How to Apply for Contractor Financing in 7 Effective Steps

In the construction industry, your ability to manage cash flow as a contractor is absolutely vital; it can either help you achieve long-term success or lead to failure due to your inability to meet financial obligations on time. Construction projects typically require a substantial amount of investment upfront, but the income is often not immediate and can take months, or even years, to come.  As a result, you are faced with the challenge of constantly and effectively juggling between cash flow and expenses to complete your project successfully. However, banks and other traditional lenders often consider the construction industry too risky to finance. So, how can contractors get the funds they need to bridge the gaps and pay for equipment, materials, and other expenses related to their project? Here’s how to apply for contractor financing:

What Is Contractor Financing?

Before we get into the steps of applying for contractor financing, let’s take a look at what contractor financing exactly is: Contractor financing is a broad term used to describe the range of financial options available for construction businesses to cover their project-related expenses, such as materials, labor, and equipment.  It encompasses various loan types, from construction loans and lines of credit to equipment loans and small business loans. This type of financing is essential for contractors to help them cover the upfront capital needed for their project.

Types of Contractor Financing

Contractor financing comes in a variety of formats. Some are more flexible, like lines of credit, while others are more purpose-driven, like term loans. The "best" option for you will depend on your business, goals, and financial circumstances. Let's explore a few of the main types of contractor financing:

• Construction line of credit

Construction lines of credit provide a revolving credit facility, which means that you can draw funds, repay them, and draw again up to the credit limit. This gives you financial flexibility and is particularly useful for managing cash flow effectively.  The credit limit that you can get will depend on the scope of your construction project, and the creditworthiness of your business. The funds can be used to cover project-related costs such as purchasing materials and paying subcontractors. Keep in mind that construction lines of credit are a short-term financing option designed to provide funding for the duration of the project. You will only pay interest on the amount that you are drawing and not the entire credit limit. 

• Equipment financing

Equipment financing is another good option for contractors who lack sufficient funding for the purchase or leasing of equipment. The loan term usually aligns with the lifespan of the equipment, varying from as little as a few months to up to 10 years. This type of financing is collateral-based, meaning that you will have to provide a collateral in order to obtain the needed funds. However, the actual equipment you are purchasing is usually the one that serves as the collateral for the loan. 

• Invoice factoring

Invoice factoring is another financial service for contractors and construction businesses. It involves selling your accounts receivable (invoices) to a third party (a factor) at a discount.  The factor advances a significant portion of the invoice value upfront and takes over the responsibility of collecting the debt from your customers. As a contractor, you will get immediate cash flow instead of waiting for the client to pay. Unlike traditional loans, invoice factoring doesn’t have a fixed repayment term. The repayment occurs when the customer pays the invoice - usually between 30 and 90 days, or whatever terms were agreed previously. 

• Trade credit

When it comes to applying for contractor financing, another financial tool that you have at your disposal is trade credit. It allows you to purchase materials from suppliers and distributors without any cash upfront. Repayment terms are usually 30, 60, and 90 days - once this time period has passed, you may start incurring interests or penalties. If you pay within the agreed-upon period, you can leverage this type of financing without paying any interests.

• Small business loans

Small business loans are another option for contractor financing - they allow you to receive a lump sum of funds to use for practically any business purpose, and repay it in up to 20 years depending on the sum, the lender, your creditworthiness, and your needs. When it comes to requirements, you should be able to show a minimum credit score of 580-620 (ideally +680), have a good financial history, and +2 years of operation in the industry. Keep in mind that the individual requirements will depend on the lender.

• Revenue-based financing

As a contractor, you can also choose to apply for revenue-based financing, which allows you to leverage the future sales of your business. In other words, the lender will provide you with capital in exchange for your business’s ongoing gross revenue.  Credit scores aren't as important in determining eligibility. Instead, lenders focus on your cash flow as the main metric of qualification. The repayment period typically varies between 3 and 5 years, and payments adjust based on monthly revenue, which is good for contractors with fluctuating income.

• SBA loans

Before we discuss the next steps for applying for contract financing, we have to mention SBA loans. Unlike other types of loans, SBA loans are partially backed by the U.S. Small Business Administration (SBA). They can be used for a variety of purposes, from refinancing debt to purchasing equipment or real estate. Depending on the loan, the term length can vary between 7 and 25 years. 

How to Apply for Contractor Financing in 7 Steps

Applying for contractor financing requires a bit more effort than simply filling out an application. You'll need to make sure you're applying for the right type of financing with the right lender and that your business is as strong as possible when entering the process. Here's a step-by-step guide for those applying for contractor financing:

1. Understand the different types of contractor financing

The first step you need to take when it comes to applying for contractor financing is to understand the different types of loans available to you. Some lenders only offer specific products, so you'll need to make sure you're planning to apply with a lender that offers your desired type of financing. At National Business Capital, our lender platform can connect you with almost any type of debt financing, which helps clients find the right capital structure for their growth plan.

2. Assess your financing needs

The next step you’ll need to take if you want to apply for contract financing is to assess your financing needs. In other words, why do you need the funds, and how much do you need? Here are a few questions that you might need to ask yourself:

• Why do I need financing? - It can be for the purchasing of equipment, vehicles, bridging the gap between income and expenses, covering operating expenses, etc.
• How much money do I need? - It is important to calculate the total cost of your project. Overestimating may lead to unnecessary debt and expenses, while underestimating can leave you short of funds.
• What is the timeframe for my financial need? - In other words, do you need the funds immediately, or can you wait? This timeline should align with your project deadline.
• What repayment term would be the most manageable for me? Consider the possible repayment terms and how they align with the project's lifespan. Be prepared to have a backup plan if revenue falls short. 
• Do I have any existing debt? - Assessing your current debts and financial situation will help you determine your eligibility for the different types of contractor financing. 

In addition to these questions, think about possible seasonal fluctuations that may impact the revenue of your business and whether you should take them into account before applying for additional financing. 

3. Review your credit score and history

The next step in order to apply for contractor financing is to review your credit score and history, as they will impact your creditworthiness - and thus the eligibility, requirements, and terms of the financing you are looking for. The exact credit score you’ll need to have will depend on the lender and the type of loan that you are applying for. However, here are some general guidelines:

• Construction line of credit - Between 600 and 630, ideally a 680 FICO or higher
• Equipment financing - It can go as low as 600, but a 680 FICO puts you in a great position for competitive terms
• Invoice factoring - Credit score is not a primary criteria, but a 650+ FICO can be beneficial
• Trade credit - There’s no minimum credit score, but +700 can get you better terms
• Small business loans - Often between 580 and 620, but +680 is ideal
• Revenue-based financing - No standardized credit score, but +680 is ideal
• SBA loans - Between 640 and 680, but 700 FICO or higher is ideal 

Knowing your credit score helps you get a better understanding of how lenders will view your creditworthiness. The higher it is, the more likely you are to get approved, and the better rates and terms you can get. Next, review your business history. Assessing your Debt-to-Income ratio is important for evaluating your capacity to take on additional debt - it should ideally be below 35-40%. A good DTI also shows lenders that you have higher repayment capability. Make sure to analyze your financial statements and look at your overall financial history. Making on-time payments is essential for establishing a good relationship with lenders and getting more favorable terms.

4. Prepare a strong business plan

In order to apply for contract financing, you should also prepare a strong business plan to present to your lender. It should include key elements such as:

• Executive summary of your business
• Business history and financial needs
• Industry and competitor analysis
• Target market
• Marketing plan
• Sales strategy
• Organizational structure
• Management team
• Financial plan

When preparing your business plan, make sure that you are clear and concise and that your financial projections are based on reasonable assumptions. The plan should be professionally formatted, and free of errors. 

5. Organize your financial statements

Before you apply for contractor financing, you should carefully organize your financial statements; this will provide the lender with a clear picture of your financial health. Be prepared to show:

• Income statement
• Balance sheet
• Cash flow statement
• Recent bank statements
• Tax returns
• Accounts receivable reports
• Payable aging reports

It is important that the information is accurate and up-to-date. Otherwise, the lender may reject it or request for it to be updated, which will slow down the application process. Make sure that you are using consistent accounting methods across all statements. If possible, have your financial statements prepared or reviewed by a certified accountant.

6. Research lenders

Now that you have all your documentation ready, the next step in applying for contractor financing is to research lenders. When doing your due diligence, look for the types of financing offered by each lender and the interest rates and fees they come with. Repayment terms, eligibility requirements, reputation, customer support, as well as speed of approval and funding are other criteria you should carefully evaluate before choosing your lender. If you feel overwhelmed doing the research manually, we have a better option: applying through National Business Capital.  With National Business Capital, you can find, compare, and secure the most competitive options that you qualify for and get access to exclusive lender offers you can’t find anywhere else. 

7. Submit your application

Once you’ve selected your lender and prepared all your documentation, the next step in applying for contractor financing is to submit your application.  It’s as easy as it can be - simply apply here, follow our streamlined process step by step, and get the best offers within minutes.

Applying for Contractor Financing 

If you are looking for the right lender for your contractor financing, look no further than National Business Capital.  With $2+ billion financed since 2007, multiple awards, and an experienced team of Business Finance Advisors, we have everything you need to find the best financing options for your project. Are you ready to get started? Apply here.