If you work as a contractor, perhaps building homes or remodeling them, you may have large up-front expenses before you ever see a dime from your client. You likely don’t have enough working capital in your bank account to cover these expenses every time, so you need to borrow money to cover them until you get paid.
And sometimes clients take a while to pay you, don’t they? That can leave you in a pickle, since you have your own expenses and payroll to cover.
Fortunately, there are several financing options for contracting businesses like yours.
What is Business Financing for General Contractors?
Business financing for general contractors includes a range of small business loans and other lending products that help a contracting business get the capital it needs to complete a job and get paid.
What Can Contractors Use Funding For?
There are many expenses in your construction business that contractor loans can cover.
If you are a real estate investor and flip homes, you can use some loans, like the 7(a) loan program offered by the Small Business Administration, to purchase real estate.
As an independent contractor, you can also use these funds for working capital: purchasing lumber, paying your staff, or buying equipment.
Essentially, you can use contractor loans for any business-related expense. However, be aware that certain types of financing, such as equipment loans, may have specific requirements for what you can use funds for.
Types of Loans and Financing for Contractors
It’s important to carefully consider all your options when it comes to the types of financing you choose for your business. There are several types of loan options available for construction companies and contractors. Below, you’ll find a few options as well as lenders we recommend.
Traditional banks, online lenders, and credit unions offer business loans, with terms anywhere from one year to five. Some may even offer longer term loans, especially for commercial real estate.
OnDeck is a recommended lender who offers term loans of $250,000 to $500,000, with repayment options up to 24 months. Another option is Kapitus, which offers loans of $5,000 to $500,000, with repayment terms of three to 36 months.
The Small Business Administration offers several loans for small businesses, including the 7(a) program mentioned above, as well as loans specifically for equipment or real estate. The advantage of these loans is their low interest rate, which will reduce what you pay for financing compared to other options.
You can apply with an SBA lender like SmartBiz to get loans between $30,000 and $5 million, with repayment terms of 10 to 25 years.
Some lenders specialize in construction loans, which may be short-term loans that are unsecured, meaning you don’t have to provide collateral. The idea is that you will finish your project quickly and can then pay off the loan.
If you need to purchase a work truck or cement mixer, you can look at equipment financing, which is specifically designed to help you pay for equipment purchases. The equipment you’re financing may also serve as your collateral.
Business Line of Credit
If you don’t need a lump sum of money all at once (with larger monthly payments coming due quickly), a line of credit could be what you need. You’re approved for a certain amount, and you can borrow against that line of credit up to that amount. Only pay back what you’ve borrowed.
If you have bad credit and don’t qualify for other types of contractor financing, a cash advance may be worth considering. A few things to note: while cash advance companies like Rapid Finance offer advances up to $600,000, the turnaround time for repayment is short: you have three to 12 months to repay the advance. And interest rates may be higher than with other options, ranging from 70 to 250%. They’re useful if you need cash fast and can repay it even faster.
Business Credit Cards
If you just need an easy solution for making purchases at the hardware store for your projects, business credit cards fit the bill. Consider a card that allows you to add other users if you have subcontractors who need to also make purchases for your business, as well as one that lets you earn rewards with every purchase. Just be aware of that monthly interest, because it can rack up your expenses quickly if you don’t pay your balance in full each month.
How to Qualify for a Contractor Loan
Each of these options for contractor financing will have certain requirements for you as a borrower, though those requirements may vary from one lender to another.
Your credit score may be considered. Banks and the SBA may have certain credit score requirements for applicants, while other options, like cash advances and equipment financing, might not.
If you are new in business, your personal credit scores may be reviewed, since your business may not have established its own scores. Learn how to establish business credit so that in the future, you can qualify for great rates on business financing.
Lenders may also look at your finances to understand annual revenue and cash flow. This can be an indicator of how risky you would be to lend to. If your revenues are low, or you don’t have much cash flow, it may be a sign that you might not be able to pay back a loan.
Another qualification for some loans may be a down payment or collateral. In the case of real estate or equipment loans, the property may serve as collateral, but in other cases, you may need to put down cash.
How to Apply for a Contractor Loan
Loan applications may vary from one lender to another, but generally, you can expect to be asked questions about your business, including time in operation and revenues. You may be asked for personal information, like your personal address and social security number.
The application process will require you to state how much you want to borrow.
If you are approved for the loan, you’ll be informed of the loan amount, interest rates, and repayment terms. If you agree to them, you’ll sign the loan document, and your funds will be deposited into your business account, typically within a few days.
Nav’s Verdict: Contractor Loans
Small business owners working in construction or contracting need working capital to stay afloat. While, yes, having cash in your bank account is always a good idea, it’s also smart to secure financing that helps you extend beyond what your bank account can cover.
That means you’ll have the ability to cover unforeseen expenses, such as replacing a window broken on site or having to pay rush shipping to get a job done on time.