The construction industry isn’t easy to operate within. Between the sporadic nature of contract work, the fluctuating costs of materials, and the seasonality of the work, managing your cash flow can seem like an impossible challenge. Even well-established businesses that have operated for 20+ years have found themselves constrained by cash flow problems, but it’s even more difficult for young businesses and entrepreneurs taking their first steps in the industry.
As you know, money doesn’t grow on trees, but how can you stay competitive if you don’t have the cash flow to take advantage of growth opportunities or tackle challenges? One method is through small business construction loans, which are a type of financing that can help you manage expenses, cover upfront contract costs, hire employees, and much more.
Securing a small business construction loan is as easy as finding a lender offering this type of financing, but reaching an approval with terms that fit your business is a bit more challenging. Many factors play into the offers you receive, including your time in business, annual revenue, and creditworthiness, and each lender’s eligibility criteria are different. Some might emphasize your credit score above all the other requirements, whereas another might need to see a longer time in business in order to offer favorable terms.
With so much uncertainty behind your small business construction loan, you’ll need solid information behind you to make a decision that benefits you and the future of your business. Don’t worry; We’ve got you covered. Here’s everything you need to know about small business construction loans, courtesy of the leading SMB FinTech marketplace—National Business Capital.
What Is a Small Business Construction Loan?
A small business construction loan is a great way for small businesses to finance the cost of building, renovation projects, or any other business expense. Whether you’re in a seasonal slump or just experienced a cash flow disruption, these specialized loan solutions provide construction businesses with access to the funds they need to stay competitive.
There are various small business construction loan types to choose from, each with its own specific benefits and drawbacks. For example, construction equipment financing can help you break down sizeable equipment purchases into more manageable payments, but it often comes with a higher interest rate. On the other hand, construction term loans provide a one-time, lump sum payment that you’ll repay throughout the term outlined by your lender. However, this type of financing may require collateral offerings or a drawn-out business plan.
Small business construction loans are essentially an influx of capital that you’ll repay to a lender on a scheduled basis. They can help you manage costs, afford opportunities, and more, making them a viable—and advantageous—option for any entrepreneur looking to grow.
How Can I Get a Small Business Construction Loan?
The benefit of your small business construction loan will depend on the type of financing you’ve chosen, the financial information of your business, and the lender you’re doing business with. If you can boast strong financial information, you’ll likely find it easy to secure a construction loan with favorable terms that fit the needs of your unique circumstances. But, as most things are, it isn’t always that easy, especially if you’re working with a bank or credit union.
Banks and credit unions, otherwise known as “traditional lenders,” often carry strict eligibility requirements. They won’t finance specific industries, nor will they budge on requirements for growing businesses that invest their profits back into their operations, which makes it difficult for entrepreneurs to secure a favorable approval.
Online, or “non-bank” lenders, are the opposite. They offer to finance a wider range of industries and carry less restrictive eligibility requirements, but it comes with one major drawback—higher interest rates. While this may deter you initially, it’s more important to focus on what your business will look like after you’ve leveraged the funds to grow rather than get caught up in the cost of your capital.
Marketplaces combine both of these lenders into one centralized platform. With one application, you can apply with both bank and non-bank lenders simultaneously, allowing you to choose the offer that best suits your business and your goals. National is one of these marketplaces, and we’re uniquely capable of streamlining the process to days—not weeks—like with traditional lenders.
Different Types of Small Business Construction Loans
Small business construction loans provide the opportunity to secure the financial resources necessary for larger, more ambitious endeavors. You can use the funds for project costs, like labor and materials, professional services, like engineering and consulting, and equipment purchases of all sizes. Whether you’re looking to expand an existing building, build a completely new facility, or just manage your cash flow during an off-season, there’s a financing solution that can help you accomplish your goals.
Here are a few of the most common types of construction loans:
Term loans are what most people think of when they hear “small business loans.” This type of loan provides funding in a lump sum payment, which you’ll repay over the term outlined by your lender before you’ve signed the agreement. You can have a fixed interest rate that stays static over time or an adjustable rate that changes with the prime rate, both of which are beneficial for specific circumstances.
Term loans are great for projects where you know exactly how much you’ll need. However, you may need to offer collateral as a method of “securing” the loan, and you might also need to provide your lender with a detailed plan of how you intend to use the funds.
Business Line of Credit
A business line of credit is one of the most flexible small business construction loan solutions on the market. Much like a credit card, you can leverage your credit line on an as-needed basis to cover business-related expenses. Once you repay the amount you’ve drawn, you can take the same funds again, allowing you the opportunity to stay one step ahead of the next challenge.
Business lines of credit are beneficial when you don’t know how much you’ll need to accomplish your goals. If you end up needing more than you expected, you can draw additional funds from your line and manage the payments over time.
Equipment financing is key for the construction industry. As you know, the equipment you need to keep up with your competition often comes with a hefty price tag that can stand between you and your business’s full potential. Many entrepreneurs struggle to afford this equipment, but with construction equipment financing, you can purchase the assets you need and break down the payments into a more manageable schedule.
The equipment you’re looking to purchase usually serves as collateral for the financing, meaning you won’t have to worry about risking another critical asset on your balance sheet. While this option does come with higher interest rates on average, the price is negligible if the equipment will serve to increase your revenue, efficiency, or productivity.
Accounts Receivable Financing
Late client invoices can prevent you from starting your next job. But, with accounts receivable financing, you can transform those outstanding payments into cash today.
The process is rather simple: you technically sell your unpaid invoices to a lender in exchange for capital, with a small percentage taken as a fee for the service. Although this won’t yield the full value of your accounts receivable, it’s a way to get the ball rolling if your business comes to a complete stop. Plus, if you can leverage the funds to start on a new contract, you can streamline your cash flow throughout the process and make it easier to meet deadlines.
How to Apply for a Construction Loan
Applying for a small business construction loan can seem like a daunting process, especially if you have no prior experience. The good news is that, with the right preparation and research, small businesses can easily access these types of loans from commercial lenders. Before you begin the application process, there are a few key steps that small business owners should take in order to give themselves the best chance of success.
Develop a Business Plan
First, it’s important to develop a solid business plan and provide financial records demonstrating your business’s sustainability. You’ll also need to gather information on the construction project you’re planning to undertake, so securing quotes and sketches is critical.
Once you’ve completed this groundwork, it’s time to find an appropriate lender. Your first stop will likely be the bank that you have a relationship with, but remember that only certain businesses can fit their mold. If they aren’t offering terms that meet your needs, your next stop will be non-bank lenders, which you can find through online research.
Apply With Multiple Lenders
You’ll want to apply with more than one lender, so you can compare the offers against each other and ensure you’re getting the best deal. However, this process takes time and effort, as you’ll need to physically fill out the applications and wait for a decision on each.
If you’re looking to streamline your search for construction loans, you should team up with a marketplace, like National Business Capital. At National, we understand that entrepreneurs can’t afford to take time away from managing the day to day of their operations to research lenders and fill out applications, so we’ve created a time-saving machine for business owners. With one application, you can receive multiple competitive offers to choose between, all while our expert Business Finance Advisors help you choose the best option for your specific circumstances.
Streamline Your Search for Small Business Construction Loans With National Business Capital
Time is money, and most entrepreneurs can’t afford to take time away from their business to research and compare lenders for small business construction loans. You might have a few seconds here and there, but that isn’t enough time to learn all the necessary information and make an educated decision on the future of your business. Many entrepreneurs end their search for this very reason, putting their growth on pause until they can find the time to step away and continue their research. But, as we know, growth can’t wait, and you might find that the game-changing opportunity that presented itself has long passed you by when you start to research your financing options again.
Rather than forgo a chance at growth or put off a challenge until a later date, you can secure a small business construction loan to free up your cash flow and grow on your terms. National Business Capital’s 75+ lender marketplace and expert team are uniquely capable of helping you secure the funds you need to accomplish your goals—and fast. While we have knowledge of almost every industry, construction financing is one of our strong suits. After we learn about you, your business, and your goals, our team can advise you on the opportunity that best fits your specific circumstances.
With $2 billion secured for entrepreneurs nationwide and 2,000+ 5-star reviews on Trustpilot, you can trust that National Business Capital is the right partner in growth for your business.
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