The construction industry isn’t easy; it took a massive hit in 2007-2008 when the housing market collapsed and has been in recovery mode ever since. Now that it’s leveled out, it’s become a competitive yet heavily regulated industry.
According to the National Association of Home Builders, the cost of complying with industry regulations has jumped almost 30%, which is about the same as the increase of new home development. With more than 10 million independent contractors, competition has never been bigger, and it’s not a cheap profession. Many contractors and construction companies need a business loan due to their massive overhead, seasonal demands, and payment gaps. So what options do contractors have to fund their business? Let’s take a look at just three great options.
Construction Business Financing
Contractors and construction companies often need a business loan in order to handle the many obstacles that are thrown their way. For example, clients don't always pay on time, but it's more common with freelancers and independent workers. It’s not fair and can really damage a business (sometimes causing them to close doors), but it’s the nature of the beast.
A construction business line of credit is a great way to finance your construction company. Today, the number of small firms that report being able to access capital is at an eight-year high of 73%! That’s great news considering traditional banks have been skittish to approve business loans since 2008.
A business loan for construction companies can come in the form of general working capital, equipment loans, inventory loans, or an expansion loan. Some of the most common reasons contractors need financing include:
- Equipment leasing and purchasing, such as machinery
- Financing large jobs
- Tools & supplies
Many start-ups and small businesses have turned to alternative business loan providers when traditional banks have said no. It really is a no-brainer when you look at all the positives of alternative financing:
- Fast turnaround – as early as 48 hours after loan approval
- Minimal paperwork
- Unsecured loan options
- Lenient credit score requirements
- No collateral requirements
- Convenience to apply from the comfort of your home or business
Alternative lending has been a life-saver for many companies over the last 5-8 years. Many of them offer short-term and long-term financing options and convenient repayment schedules to lessen the burden of a large, one-time monthly payment. The one downfall some may find of alternative lending could be the interest rate. Due to lower credit standards compared to the Small Business Administration (SBA) or brick-and-mortar banks, alternative lenders often charge a higher interest rate to offset the risk involved. If you choose to go with alternative lender, be sure to watch for these 6 signs.
Another way contractors can get a business loan is through a traditional bank, such as their local community bank, or through the SBA. The SBA has some great programs available for businesses, but the amount they can loan each year is capped, and it can be a very lengthy process due to documentation requirements. It’s also important to note that the SBA and traditional banks typically don’t accept start-ups. Check out the top five reasons your bank loan could be denied.
Collateral-based loans are considered secured loans. A secured loan is one that is backed by something the borrower owns, such as real estate, inventory, and large machinery. This type of loan is popular among traditional financial institutions because it’s less risky to the bank. If the borrower defaults on their loan, the bank simply acquires the pledged collateral of the business. This is good for banks, but bad for businesses. Furthermore, collateral typically requires a certified appraisal, costing you more time and money.
Equipment leasing allows banks to lend equipment to a company for a monthly fee for a predetermined number of months. At the end of the agreement or term, the contractor/company can choose to purchase the equipment at market value, continue leasing, or return the equipment.
As mentioned above, owning your own equipment is very important for contractors. It allows contractors the freedom to accept any new job or contract without the concern of finding the right equipment during the dates it is needed. Additionally, tax write-offs can be huge considering the cost to own some of the tools and machinery.
On the other hand, some may find 100% ownership of equipment to be unnecessary due to the overhead of storing equipment or if certain tools and machines aren’t used on a regular basis. In this instance, it may make the most sense to lease construction equipment. Contractors can lease almost anything business-related that holds value such as computers or an entire office. As with all borrowing options, there are upsides and downsides to leasing construction equipment. The positives are freed up lines of credit, equipment upgrades after the lease expires, and possible business deductions. The negatives include a higher price over the long-term and the commitment to the lease even if you no longer need the equipment for the entire duration of the lease.
Regardless of the size of your company or specialty, custom small business solutions are often needed for the construction industry. Just be sure to do thoroughly conduct research before choosing the best option for you.