Construction is a lucrative industry, but the benefits are only attainable if you have the cash flow to operate at your highest capacity.
Whether you’ve operated for 10+ years in your space or you’re just getting started, it’s important to have a capital source in place for when you need liquidity. Some entrepreneurs choose to leverage construction loans or equipment financing, but if you’re looking for the most flexible option, you can’t go wrong with a construction line of credit.
Lines of credit allow you to draw physical cash on an as-needed basis for any business expense or opportunity. Continue reading for a breakdown of construction lines of credit and, more importantly, how to leverage this type of financing to grow your business.
Construction lines of credit are a type of business financing that allows you to draw funds on a flexible schedule and manage the repayments over time. Here’s how the process works.
Another key benefit of construction lines of credit is that you only pay interest on the amount you’ve borrowed, not the total credit limit. If your line has a “revolving” term, you can draw the same funds again after you’ve paid off your existing balance.
Construction lines of credit come in two main formats: secured and unsecured. Much like other financing products, the main difference between the two is collateral.
A secured business line of credit is backed by a collateral offering. This can be a tangible asset, like real estate or equipment, or an intangible asset, like your accounts receivable or intellectual property. If you default on your repayment, the lender can seize the collateralized asset as a method of recouping the unpaid funds.
Unsecured lines of credit don’t require a collateral offering. This is most people’s preferred option, but you should consider the strict eligibility criteria that come along with this type of financing. Generally speaking, unsecured lines of credit come with higher minimum credit scores and more substantial revenue requirements.
Think about it: Lenders use collateral as an added layer of protection against defaults. By not requiring collateral, the lender is at an increased risk of losing out on the borrowed funds, so they’ll raise the minimum eligibility requirements for an added layer of protection.
You aren’t limited in how you use the funds from your construction line of credit as long as you’re using it for business purposes. But, of course, there are more strategic ways of applying the funds to your business.
Managing cash flow isn’t easy in any industry, but it’s especially difficult for construction businesses. With a line of credit in place, you can draw funds to handle unexpected expenses and protect your cash flow from a sudden, sizeable cost. Or, if you prefer, you can use the funds from your line of credit to manage all of your expenses while you shift your focus to growth opportunities—it’s all up to you.
Late invoices and outstanding customer payments can leave you without the funds you need to take on new jobs or complete ongoing ones. Construction lines of credit provide funding to get through these times, allowing you to continue your momentum and operate at your highest capacity without interruption.
The funding from a construction line of credit complements your income, if managed correctly, and increases your purchasing power to take advantage of opportunities. For instance, some businesses leverage their financing to negotiate bulk discounts on inventory orders.
Most importantly, you should avoid “throwing money” at challenges or problems in your business. It’s easy to see what’s costing the most money in your day-to-day operations, but it’s much more meaningful to attack the root of a problem and become a stronger organization.
For example, let’s say your business has a sizeable monthly expense for inventory. You can see that the expense is putting pressure on your cash flow, but leveraging funds from your construction line of credit to pay off this expense for a few months will leave you right where you started. Instead, it’s worthwhile to take a moment and review the challenge from multiple perspectives. Maybe you can establish a new supplier relationship with your increased purchasing power, or maybe you can build out your storage room to hold more inventory and put the expense on a more manageable schedule.
Either way, you’ll achieve more results if you solve the root cause of a problem rather than using the funds to tread water.
For most loan options, you’ll pay interest on the entire loan amount. But, for business lines of credit, you only pay interest on the amount you’ve drawn.
Interest rates vary from 4% to 60%, depending on the financial background of your business and the lender you’re working with.
Let’s say you have a line of credit with a limit of $100,000. If you draw $30,000 from your line, you only pay interest on that $30,000 rather than the full $100,000.
The structure allows you to keep your line of credit in your back pocket when you need it, but you should be wary of hidden fees and contingencies in your contract. Something like a “zero balance clause,” which requires you to hold a zero outstanding balance for a set period of time, can significantly complicate your financing and make it difficult to grow. For the best results, work with a transparent lender, and ensure you’ve read over the entirety of your contract before signing on the dotted line.
Other financing solutions, like term loans, equipment financing, and revenue-based financing, come in one-time lump sum payments, where you’re provided a set amount of money and a schedule to pay it back. Lenders may require a detailed business plan before approving you. And, if you need additional capital for any reason, you have to speak with your lender and take out a completely new loan.
Construction lines of credit are much more flexible in their application. Once you establish the credit line with a lender, you can draw funds on your schedule and never have to worry about asking permission to use your funds.
Here are a few of the benefits construction lines of credit hold over other financing products.
Bank and non-bank lenders all have different eligibility requirements for construction lines of credit. Here’s what you’ll need for bank lenders.
For non-bank lenders, the qualifications are a bit easier.
Keep in mind that the only way to ensure you’re selecting the best offer for your business is by shopping around and comparing approvals. This means you’ll have to fill out multiple applications and wait for a decision on each, which can take weeks or even months in some cases. If you’re looking to streamline your search for a construction line of credit, you should consider working with a FinTech marketplace.
Marketplaces reduce application to funding times considerably. Rather than apply with lenders one by one, you can apply with multiple organizations with one digital application. National Business Capital takes this benefit one step further by offering expert advice alongside their marketplace. Their clients not only find the right lender, but they’re given knowledgeable guidance on selecting the right offer for the future of their business.
There’s no reason to wait 5-6 weeks for the funds you need to grow. With a network of 75+ lending partners and an award-winning team behind every funding, National Business Capital is a time-saving machine for entrepreneurs looking to grow and scale their businesses.
We’ve secured $2 billion through 27,000 transactions, earning over 3,000 5-star reviews from satisfied entrepreneurs and “Driving Growth for All” every step of the way. Complete our digital application to get started and see firsthand the speed, simplicity, and professionalism that made us who we are today.
Construction companies can leverage lines of credit to
This type of financing can act as a financial safety net or a resource to drive success in your business.
Yes! Making consistent, timely payments on your line of credit strengthens your credit score. Late payments and defaults have the opposite effect on your credit score, so make sure to manage your repayment carefully.
Lines of credit are best used for recurring payments or less expensive one-off purchases. If you’re looking to make a more significant purchase, you might find more benefit in a structured form of financing, like a term loan or SBA loan, because of the higher funding amounts and longer repayment terms associated with these types of financing.
National Business Capital helps entrepreneurs secure quick and fair financing to save time and cultivate sustainable growth.
Our stress-free online platform is designed for simplicity and speed, helping business owners go from application to approval in a matter of hours. And while we remain a leader in the Fintech industry, our clients agree it’s our personalized service and award-winning team that sets us apart.
From SBA loans to lines of credit, to equipment financing, and more, business owners can access all the different financing programs available to them in one place. Through our streamlined process, we have helped clients secure $2 billion in financing since 2007, and, more importantly, we’ve helped entrepreneurs save a tremendous amount of time and grow faster.
Lauren is the Marketing Manager at Nationalbusinesscapital.com. She has 7 years of professional experience with a focus on small business marketing and finance. She previously worked as a senior business analyst for B2B SaaS, Sky IT Group. She has covered topics including, business financing, startups, retail, taxes & regulations, etc. Her work has been featured by USA Today, Google & Yahoo News. Lauren holds a B.A. from the Fashion Institute of Technology’s (FIT) School of Business.