The construction industry is capital-intensive. Construction business owners need to shell out a significant amount of money in order to make money. Even if you don’t think you need construction business loans, it’s only a matter of time before you do. However, securing finance for your construction business can be challenging for inexperienced borrowers. If you’re looking to apply for a business loan, it’s important to know all there is to know about the different types of loans.
- SBA Loans
If you’ve been in the industry for a while, you might have heard of SBA loans. It’s a known fact that small business owners are having a hard time securing funding. The US government, in the form of the Small Business Administration (SBA), created a variety of SBA loan programs for the benefit of small business owners.
Contrary to what most people assume, the Small Business Administration isn’t the one lending you the money. SBA-approved financial institutions are the ones that provide the funds. The SBA only guarantees up to 85% of the entire loan amount in case the borrower defaults. This incentivizes lenders to extend funding and provide favorable terms to business owners. SBA loans have longer repayment periods, lower interest rates, lower down payments, and larger loan amounts compared to other loans.
It’s no wonder why SBA loans are one of the most sought-after financing programs. They offer different types of loans such as SBA microloans, SBA 7(a) loans (the most popular), and SBA 504/CDC loans to name a few.
- Business Line of Credit
A business line of credit functions like your regular business credit card. Once approved, your lender will give you a credit limit and you can withdraw funds from it as needed. The amount of your credit limit is based on your company’s financial profile, as well as your personal credit.
You can withdraw any amount you want to borrow as long as you won’t go beyond your credit limit. The beauty of business lines of credit is that you only have to pay the interest on the money you’ve withdrawn, not the entire credit limit. As long as you pay on time, the interest rates for a line of credit is relatively lower than business credit cards.
Another benefit of a business line of credit many construction companies enjoy is its flexibility. A business line of credit is revolving, which is great for handling unforeseen expenses such as repairing broken equipment, hiring and training new employees, and having an emergency fund. It’s also perfect if you need a financial bump for unexpected business growth opportunities.
- Asset-Based Loans
With asset-based loans, you can use your existing business assets to obtain funding for your business. Traditional loans often assess your cash flow first, collateral second. Asset-based loans, on the other hand, asset-based loans rely on your collateral rather than cash flow.
Lenders often provide the funds from an asset-based loan through an asset-based line of credit or asset-based term loan. The asset-based line of credit is similar to your regular business line of credit because it’s revolving. Most lenders assign you to a maximum credit limit against your collateral. By relying on your business assets for funding, you’ll be able to grow your business while maintaining the liquidity it needs for daily operations.
- Equipment Financing
Construction companies need a variety of construction equipment to carry out projects. However, construction equipment can be very costly and small-time contractors may find it difficult to fund equipment purchases out of pocket. If you don’t have the funds to purchase the equipment you need, you can check out equipment financing.
Equipment financing gives you the working capital you necessary to purchase the equipment you need for your construction company. To qualify, most lenders require you to submit a quote, as well as a down payment for the equipment you’re looking to purchase. Once qualified, lenders will give you 80%, and in some cases, 100% of the cash you need to purchase equipment. Repayment terms are similar to a regular loan where you pay regular monthly payments. The duration of the loan depends on the value and usability of the equipment.
The equipment your purchase serves as collateral for the loan, so you don’t have to put your personal or business assets on the line. In case of default, the lenders have the right to repossess the equipment to make up for the debt. This setup mitigates the lender’s risk, which increases your chances for approval.
Apply for Any of These Construction Business Loans Today!
If you’re interested to know more about construction business loans, SMB Compass’ team of financial advisors can help! We offer FREE, no-obligation consultations for small business owners. Simply call us today at (888) 893- or email us at [email protected].