The construction industry is both exciting and volatile. As the pendulum swings between economic lows and highs, it’s not a question of “if” you’ll need access to capital to finance your business, but “when.”
Construction businesses are unique in that they require significant outlays of cash at each stage of a job, making flexible access to working capital a must. Also, heavy equipment is often critical to success, but the costs can be hard to bear.
There’s also seasonality to consider. When winter hits, depending on your location, you may need more money in the bank to protect your business against a cash flow crisis.
Many business owners think of getting a traditional term loan for these purposes, but it isn’t the only option. If you need access to credit for your construction business, there are many financing opportunities to explore. Here are a few.
Working capital is the money available for your business to handle daily expenses. Because of the large cash outlays that construction businesses must make, they need a large amount of working capital in the bank to cover situations like big work orders, payroll, expansion and growth, seasonal slumps, and slow-paying clients.
Carl Phinney owns Opportunity Construction, a company dedicated to rebuilding the nation’s infrastructure, and he knows only too well the challenge of securing working capital. “The biggest challenge of my life is to find working capital to sustain day-to-day operations. I had to put personal money into the business…because of the difficulty of finding capital,” said Phinney in an interview.
If your working capital funds could do with a boost, you have many financing options.
You can use funds from term loans (such as SBA loan programs) as working capital, although they have a tough application process and it can take months for funds to hit your bank account.
A more flexible solution is a business line of credit or even invoice financing. With invoice financing, you get an advance on your outstanding invoices, so you don’t have to wait for your customer to pay you.
Unlike construction invoice factoring, in which factoring companies take a percentage of your invoice, with invoice financing you get up to 100% of your invoice amount and, if you’re approved, you can get access to funds as soon as the next business day.
Construction loans are bank-issued short term financing solutions that can be used to finance a new home or real estate project. Homeowners or contractors can apply for these loans and can use the funds for the actual building as well as equipment, materials, or hiring employees. Unlike term loans, a lender will typically release the funds in a series of lump sums during the building project.
One example of a construction loan is a construction mortgage loan. You can use these loans to finance a land purchase or home construction on land you already own. For bigger projects, such as a multi-family home or apartment buildings, commercial construction loans are an option.
Most lenders consider construction loans risky, which has some implications if you choose to go this route. In addition to high interest rates, you may face stiff application requirements — including a large down payment (20%or more), a high personal credit score, financial documents, a good reputation, detailed building plans, and an appraisal.
If you’re in the market for a commercial construction loan, don’t expect to fully fund your project this way. Banks often ask borrowers to shoulder most of the risk associated with these loans and cover up to 90% of the construction cost themselves.
A flexible and attractive alternative to construction loans is Fundbox. Fundbox offers credit up to $100,000 to approved construction businesses in need of funding, and credit decisions can take only a few minutes. If approved, you can use the funds however you want for your business and repay them over a 12- to 24-week schedule.
There are several options for funding construction equipment purchases. Small business loans from a bank or the SBA can help. Or you can apply for an equipment loan. These loans are often easier to get than a small business loan since credit standards are less stringent and rely on factors such as your experience with the equipment. Lenders will ask for a down payment, but this requirement may be reduced if you have enough assets that the bank will use as collateral.
If you don’t want to buy, you can lease equipment. Leasing gives you the benefit of the most up-to-date equipment, lower monthly payments, and flexible terms. Sometimes servicing costs are also included.