Contractor Loans: The Guide to General Contractor Business Financing
Contractors confront a substantial capital investment during a project —typically months before you are paid a penny. Traditional lenders, such as banks, typically view construction as too risky to lend money for. So, how can contractors get money to pay for materials, equipment, and other project costs? The benefits and cons of each contractor financing option are outlined in this guide to business financing for general contractors!
WHAT IS CONTRACTOR FINANCING?
Builders benefit from contractor financing since it gives them early access to capital or allows for deferred payment for expenses. It can take weeks or even months to collect debts in the construction business because of the high reliance on credit (not counting retainage, which could take years).
The fact is that contractors must pay for their inputs before they have the money to meet their costs, such as labor, materials, equipment, and so on. For many enterprises in other industries, traditional financial institutions offer low-interest financing options. Unfortunately, construction companies typically have a difficult time obtaining traditional financing because of the financial risk inherent in the building industry.
The Benefits of Getting Financing for Your Business
Even so, if possible, contractor financing has many advantages and benefits, and here we tell you about them all. The following are the main reasons to get business financing:
Improve Your Business Cash Flow
As a small business owner, paying bills on time and delaying others is a thing of the past, thanks to contractor finance. To keep your projects on track, you'll have the money you need to pay your staff and subcontractors, purchase materials, and so on.
Close Jobs Faster
Often, contractors don't have the money to buy the goods they need until they get paid, which means they can't proceed. For small business owners, keeping clients satisfied and attracting new ones is easier when projects are completed on schedule. Allows for the next big project and keeps earnings rolling in.
Land Bigger Projects
With larger commercial construction projects, your firm's capacity and reputation are pushed to the limit, but so is your company's ability to pay its bills. With constructor financing, the possibility of landing bigger projects becomes an easier reality.
Grow Your Construction Business
In order to expand your construction company, you'll need to invest money to hire new employees with the right skills, reach out to new customers, and purchase new equipment. Financing is a shot at giving you the working capital you need to hire top staff and market to bigger and better customers.
How You Can Use General Contractor Loans
Your firm may face a number of charges, and if you borrow money when you secure a general contractor loan, it might help you handle those costs. In most cases, you can use the general contractor loans cash in:
- Payroll Bank Account.
- Materials and supplies for construction.
- Insurance plan.
- Unexpected problems with the project.
- Bidding on upcoming projects.
- Purchasing bonds to serve as insurance in the event of a problem.
- Purchase a new piece of equipment (or update old machinery).
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Contractor financing options
Where and how to seek contractor financing? Here are the main options to get business financing:
Trade Credit For General Contractors
In trade credit, a contractor receives the materials he needs to complete the project in exchange for an agreed-upon payment later. A 0% interest rate for a construction loan from suppliers to contractors allows them to defer payment of building materials or supplies in the short term.
Project Cost Financing for General Contractors
Labor and materials must be paid upfront by contractors, but they generally don't get paid back until 2-3 months after the job is completed. Trade credit and credit cards, for example, often have 30-day monthly payment terms before interest and penalties kick in.
Equipment financing for General Contractors
It may be time to seek equipment finance if your new building project needs an expensive crane or your current equipment isn't up to standard. With equipment financing, you can buy new machinery without having to pay the full price upfront because it's not technically a loan (it's called financing). It’s recommended that you maintain some of your operating capital in order to cover additional expenses.
Alternative Contractor Financing
Alternative methods of financing include things like construction business loans, crowdfunding, leasing, factoring, franchising, angel investors, and venture capitalists.
Material Financing for General Contractors
Similar to trade credit, this construction business loan allows you to purchase goods and services without having to pay for them for 30 to 45 days, depending on the vendor's terms. But you can extend those 30-day maturities to 120-days with sufficient finance.
Business Lines of Credit for General Contractors
When you require a general contractor loan with a lot of wiggle room from Credit Unions, a business line of credit is a great choice. To begin, you'll be eligible for a certain amount of money, which you can gradually withdraw from. Furthermore, you'll only be charged interest on the money you actually receive, not the money you're eligible to receive.
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Invoice Factoring for General Contractors
When you sell your unpaid invoices to a third party, you are engaging in the practice known as invoice factoring. It's common practice for them to pay you a portion of the invoice beforehand, typically 70% to 90%, and then pay you the remainder when they collect, minus a charge.
General Contractors Equipment Financing
A cement mixer or work truck can be purchased with equipment finance, which is meant to assist you in paying for your equipment purchases. Also, you may be able to use the equipment you're financing as collateral.
Bank and SBA Loans for General Contractors
Small Business Administration (SBA) loans, which are popular across a wide range of industries, provide substantial sums of money at moderate interest rates. Alternatively, you may be eligible for an extended repayment term, which means that you won't have to pay back your SBA loan immediately.
Business Credit Cards for General Contractors
As long as you don't mind paying with cash, business credit cards are ideal. It's important to look into a card that allows you to add additional users in the event you have subcontractors who also need to make purchases for your firm.
What General Contractors Should Know About Loans
The following are some examples of what general contractors should look out for when applying for a loan:
- Demand
While demand for renovations is soaring, it is declining for newly constructed homes. - Labor
The severe lack of skilled laborers is the main challenge that general contractors are currently experiencing. Every single area of the engineering and construction profession requires a unique skill set that is challenging to learn through formal education or practical experience. - Technology
In the past, general contractors were sluggish to hire younger workers and implement new technologies, but this is now changing.
- Certification
As demand for environmentally friendly living increases, so does the demand for green buildings in both the commercial and residential sectors. - Modernization
The restaurant industry is flourishing, for example, and 76% of customers are more likely to visit a place that serves fresh, local, and healthy food. It’s all about being up to date with modern people’s needs.
The risk & cost of contractor financing
In the past, traditional financiers shunned the building business because they believed it to be too hazardous. The ability of lenders to accurately assess a contractor's credit risk has been hampered by the large number of variables that are beyond the control of a single contractor.
Predatory firms have sprung up to provide "loans" that aren't supervised by banking authorities. Some of the organizations that provide these alternatives make big promises and use flashy marketing to entice contractors, but contractors often find that they have to pay far more than they anticipated. Be mindful of all options before making a decision.
How to qualify for better financing
Firstly, to qualify for funding, you must essentially persuade a lender that you will repay their money if they lend it to you. Be careful, as financial institutions' methods for calculating financial risk are significantly improving.
Secondly, contractors should choose the projects they work on with greater caution. A contractor should review the past payment practices of other contractors on the job and those of the property owner. Contractors looking for lending opportunities should also be aware that their payment history will be scrutinized —such as whether the contractor is protecting their mechanics' lien rights. This will help lenders get a clearer picture of the financial health of a contractor (and a project).
And thirdly, the creditworthiness of a contractor is still mostly determined by their financial statements and credit history for conventional forms of financing, like bank loans and trade credit. To ensure they can be approved for the proper kind of funding when needed, contractors should continually improve their tracking and reporting procedures in collaboration with their accountants or financial manager.
Also, the mortgage loans that real estate developers get after a certain project has been finished are referred to as "permanent loans" in the real estate industry. The construction loans that the developer of a contracting business used to finance the building's development and preparation for sale are often replaced by these permanent mortgage loans. The amortized lengths for permanent real estate loans are often in the 15 to 30 year range, with 25 years being a popular example. In this instance as well, the phrase "permanent" is used, while a more true definition would be "long-term loan."
If you take all that into account, then you’ll have a bigger chance of getting the business financing you’ve been looking for!
We know that the world of loans is not easy to wander, less when you are a contractor and have a business to run. We hope this guide has given you an idea of how to stay alert and tackle any financial problems you might have regarding business financing for general contractors. The Quick Capital Funding team is always available to answer all your questions and get you the loan you deserve!
Quick Capital Funding is willing to guide you in the right direction of getting the loan you deserve.
