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A Strategic Guide to Qualifying for Construction Financing

Business Finance

A Strategic Guide to Qualifying for Construction Financing

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Updated: Oct 22, 2019

Starting and growing a construction company can require tight financial controls. From putting together an estimate and figuring out a payment schedule to managing teams of employees and subs, a lot of money gets moved around — and you need to make sure everything adds up. 

Sometimes, strategically using construction financing can be essential for staying in business. But you need to know where to look for commercial construction financing, how to qualify, and be prepared ahead of time if you want to get the best rates and terms. 

Please note that we’re discussion financing for construction companies, which are different than construction loans for someone who wants to build their own home. 

Look over all the construction financing options

Whether you’re looking for a short-term construction loan to help your cash flow, financing a large purchase, or want access to a credit line just in case, construction companies may be able to qualify for a wide range of financing options. 

Nicole Landau, president of Landau Consulting Solutions, which offers outsourced CFO and accounting services for construction companies, often helps clients understand their choices and prepare their applications. 

Figuring out which commercial construction financing option is best can depend on why you need the money and your business’ financial situation. But no matter what, definitely look at the rates and terms says Landau. She suggests you also consider how often you have to make payments and how long you’ll have to repay the entire construction loan.

Keep this in mind as you consider some of the most popular options: 

Construction-specific loans

Some financial institutions offer specially structured loans for construction companies. Often, you’ll receive part of the loan at the start. Then, you’ll get subsequent disbursements at certain completion points, such as when you pour the foundation or complete the framing. 

Equipment loans

Similar to taking out an auto loan to buy a car, you may be able to get a secured loan to purchase heavy machinery. If you find yourself needing the same machinery for multiple jobs, buying it with a short term construction loan could be a better option than repeatedly renting or leasing the equipment. 

Small Business Administration (SBA) loans

Banks, community development organizations, and credit unions partner with the Small Business Administration (SBA) to offer several types of SBA loans. These loans may offer appealing terms and low-interest rates, but it can take months to complete the application process and receive your short term construction loan. 

Traditional bank loans

Banks and credit unions may offer small business loans to construction companies. These are generally term loans that give you the loan amount upfront and then require monthly payments. Landau says, “some clients will go with their local bank because they already have a history with the bank and don’t need to provide as much documentation.” However, she points out that that you might not get the best rates if you don’t shop around and consider other lenders as well. There can also be a lot of paperwork involved or tedious loan requirements for commercial construction businesses if you apply for a loan with a local banker. 

Online short term construction financing

Online-only lenders may offer term loans and lines of credit and generally have two advantages versus traditional brick-and-mortar lenders. A smooth online application process that uses automation to evaluate applications and quickly get you an answer is one benefit of this construction financing option. Another is potentially lower rates and fewer fees because online lenders may have less overhead than traditional lenders. If you don’t have a lot of time to deal with commercial construction loan requirements and applications and you need the funds quickly, an online loan could be a good option. 

Business line of credit

Rather than taking out a loan, you could open a business line of credit. Once opened, the credit line allows you to borrow money up until you reach the account’s credit limit. You only pay interest on the amount you do borrow against your credit line, but you generally aren’t required to take out a loan. This makes a line of credit a flexible and potentially inexpensive option for commercial construction financing if you only occasionally need short-term loans. However, the fees and variable interest rates can make it more expensive than a term loan if you need to borrow a lot of money. 

Business credit cards

You could open up a business credit card for your construction company. Business credit cards tend to have much higher interest rates than short term construction loans or lines of credit. However, just like with personal cards, if you pay your bill in full each month, you generally won’t have to pay any interest. A credit card can help with short-term cash flow, but shouldn’t be your first option for borrowing large amounts of money. 

Invoice financing

Invoice financing or factoring lets you borrow money based on your unpaid invoices. Generally, you’ll receive a percentage of the invoice amount from the factoring company. Your clients will send the invoice payment to the factoring company, which will then send you the remaining amount due minus its fees and interest. Factoring can be a good construction financing option if you’re struggling with cash flow and have trouble qualifying for a loan, but compare factors’ rates, fees, and terms before signing up with a company. 

Review the commercial construction financing requirements

Lenders’ requirements can vary greatly depending on the type of construction financing you’re pursuing. Even lenders that offer the same types of loans may have different requirements, so review the requirements ahead of time and make sure you have everything in order before applying.

Generally, if you’re looking for commercial construction financing, you may need to provide: 

  • The company’s financial statements, including its balance sheet and profit and loss statement. 
  • Bank statements, personal and business tax returns, and a list of the company’s current debts.
  • A list of the company’s current vendor trade partnerships and terms. 
  • Authorization for the lender to review your personal and business credit reports and scores. However, business credit reports and scores aren’t always available because some small businesses haven’t established business credit. 

With your permission, some lenders (particularly online-only lenders) can connect to your online bank, credit card, and other business accounts to quickly pull and analyze your business’ information. They may also consider the company’s social media presence and online reviews. 

Prepare your application material for a short term construction loan ahead of time

Having most of the documents ready to go can make the application and review process much easier. It may also shine a good light on your business if you’re preparing a paper application. 

“Getting balance sheet cleaned up is really important when you’re going for financing,” says Landau. Lenders can use your balance sheet to look up financial ratios and determine your ability to repay the debt. 

Some lenders will also call references, such as your vendors, to better understand your business’ history of repaying loans. “You might find yourself in a situation where you need credit because you’re behind with vendors,” says Landau. “Have good vendors that you can turn to as referrals.” 

Compare construction financing terms and submit your applications

Once you’ve figured out the best type of construction financing for your situation, you’ll want to compare lenders. Narrow down your list based on the lenders’ minimum requirements, such as revenue, years in business, credit scores, and maximum debt-to-income (DTI) ratios. Then consider:

  • Minimum and maximum loan limits
  • Minimum and maximum loan repayment terms
  • The potential interest rate
  • Origination and prepayment fees
  • Additional fees
  • Restrictions on how you can use the money
  • How long it’ll take you to receive the money

After finding a few top choices, submit your loan applications and see if you qualify and what rates and terms the lenders offer. Then, you can choose the best construction financing option. 

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