5 Questions to Ask Before Applying for a Contractor Loan

Financing is a necessity for many general contractors who have to manage cash flow on multiple projects. And from a business credit card you use for everyday supplies to a loan you take out before the start of your largest building project yet, contractor loans can come in a variety of forms. 

As you consider your options for a contractor or commercial construction loan, keep these five questions in mind. They can help you evaluate your options and make sure you get the best possible financing for your situation. 

To avoid confusion, note that these questions are for construction companies that are looking for financing. They’re not for individuals who need a loan to build or remodel a home, or for small businesses that are taking out a loan to build or remodel a commercial property. 

1. Why do you need contractor loans?

There are different types of loans for general contractors, and different forms of financing may be best depending on why you need the money. 

For example, if you need a working capital loan to cover expenses while you quickly expand, you might be looking for a term loan that will give you a lump sum payout that you repay with fixed monthly payments. However, if you only need to float a little money between progress payments, a business line of credit or credit card might be a better fit. 

Similarly, consider your timeline and how quickly you need the money. The Small Business Administration (SBA) partners with traditional lenders, such as banks and community development organizations, and offers large loans with favorable rates. However, the application and funding process can take months, making it not the ideal type of contractor funding for those on a brief timeline. 

By contrast, you may be able to complete an online lender’s application in minutes and get a contractor loan within a couple of days or weeks. Even if the loan is a little more expensive, it may be the best option if you need to borrow money right away. 

If you’re looking for contractor funding for a specific project, a construction loan (rather than a more general small loan for your construction business) may make the most sense. One example could be a loan that’s structured so you receive enough money to cover your estimated expenses before the start of a project and make interest-only payments while you’re building. Once you complete the project, you’ll make full principal and interest payments. 

2. How do the loans’ terms differ?

After deciding what type of contractor funding you’ll ideally use, start to look at different lenders and see how their loans’ terms differ. You likely won’t know your specific offer until after you apply and the lender reviews your application, business details, and credit. However, you can still narrow in the best options for your circumstances by asking a few general questions:

• When will I receive the money? Lenders may have different timelines for how quickly they can get money into your account. Also, consider how some contractor loans will pay out on a draw schedule while others may offer you the full amount in a lump sum upfront. Or, with a business line of credit, you can choose when to take each draw. 
• Is the loan secured? It can be easier to get approved for a secured loan, but you’re also taking on more risk by offering the lender collateral. For example, you may be able to take out an equipment loan to purchase a new piece of machinery, and the machinery will be the collateral for the loan. Or, for many construction loans, the property that’s under construction could be collateral. 
• How often are payments due on a loan for contractors? Whether you’ll have to make payments weekly, biweekly, monthly or on a different schedule can impact your cash flow and the viability of the loan. 
• What’s the annual percentage rate (APR) range? Your loan’s interest rate and APR can vary depending on your creditworthiness, loan amount, and the lender. Lenders will often publish an APR range, which can give you a sense of the potential cost of the contractor loan. Also, consider whether the loan has a fixed interest rate, or whether it has a variable rate that could rise in the future. 

3. What fees will you pay on contractor loans?

Lenders may charge a variety. Some of these may sound familiar if you’ve taken out a personal loan or small business loan before, but others are less common outside of the construction business financing environment. 

The fee type and amount can depend on the lender and your creditworthiness. Here are a few of the ones you should look for as you consider a contractor loan:

• Documentation or processing fee: Lenders may charge you a fee to review your application before determining if you qualify for a loan. You may need to pay this even if your application isn’t approved. 
• Origination, commitment, or issuance fee: An upfront fee you may have to pay to borrow money. Often, the fee is a percentage of the total loan amount. 
• Fund control fee: If you’re taking draws on your contractor loan, you may need to pay a fund control fee each time you request an additional draw. 
• Prepayment penalties: Some lenders may charge you a fee if you repay your loan before the specified repayment period is over. 
• Exit fee: You may have to pay an exit fee when you finish repaying the loan, even if you don’t repay the loan early. Sometimes, the exit fee increases the longer you take to repay the loan. 
• Avoidable fees: There are some fees that you may be able to avoid but should still look for in the loan agreement, such as a late payment or non-sufficient funds fee.

4. What are the lender’s requirements?

As you’re comparing the terms of the loans for contractors, also try to review each lender’s requirements to be certain that you can qualify for a loan. Some lenders may list minimum credit scores for the business or business’s owners, require your business has a certain amount of revenue, or only offer contractor loans to companies that have been in business for several years.

Some lenders might not share all of their requirements or list everything online. If you think you’ve found a good financing option, you could call (or visit a local branch if you’ve decided on a bank or credit union) the lender to ask additional questions. 

5. Will borrowing money strain your business?

Sometimes you need money to make money and contractor funding can help your company grow. But before you sign the loan agreement, take a step back and make sure the repayment terms work for your business. 

It may be better to pass on a job than to put your company and employees in danger by taking out contractor loans that will squeeze you too tightly. Or, you may need to keep looking to find a lender that will offer a similar amount of money with more favorable terms. 

Funding Circle offers contractor loans and financing. You can take six months to five years to repay the loan, and competitive interest rates. You can complete the entire process online, with an application taking just 10 minutes and a decision being made as soon as 24 hours after you submit the required documents. 

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