The contracting business is highly seasonal. It lags in the winter months and picks back up in the summertime.
It's also very competitive with companies that have more working capital winning job bids over cash-poor companies.
These are just some of the reasons that construction contractors often experience uneven cash flow. It's a good thing there are outside financing options available in these scenarios.
Contractors run just like any other small business, requiring cash for things like equipment and supplies. There's always the need to fund payroll and sometimes subcontractors and insurance. Having cash on hand for other payments and unexpected costs can mean the difference between a company making it or not.
In this article, we're discussing different types of loans for contractors and how they can affect your small business. Keep reading to learn more.
Small Business Administration Loans
The Small Business Administration is a government agency that partners with lenders in order to guarantee loan amounts up to a certain value.
They have a CAPLines program that involves five lines of credit:
- Standard Asset-Based Credit Line
- Small Asset-Based Credit Line
Borrowers will enjoy loan amount guarantees of up to $3.75 million on all loans except the Small Asset-Based Credit Line which guarantees up to $200,000.
These programs tend to feature cheaper and more generous loans. Strict underwriting requirements mean it can take months to process a loan. And, approval rates aren't high.
Some online lenders that may partner with this administration could cut funding time to a few months but count on waiting ninety days in most cases. Applications for larger amounts may take longer for the lender to process.
Keep in mind that eligibility for a Small Business Administration loan may vary depending on the type of program you intend to pursue.
The most important thing to know about bank loans for contractors is that you must have good credit, no history of bankruptcy and plenty of business experience. You should also have plenty of collateral to back up your projected loan value.
Banks, however, are not known for small business lending. They can't recoup the costs with low-interest rates and the risk isn't worth their time.
If you do decide to take the bank lending route, be prepared to wait at least a month for approval and funding. Traditional financial institutions do tend to offer the most generous terms and lowest rates when compared to other lenders.
Another thing to keep in mind is if you require bonding on any of your current projects when you go to secure a bank loan. Banks tend to shy away from bonding companies so you may be forced to take another route in this case.
Although online lenders provide quicker and easier ways to obtain loans, they also come with higher rates.
Borrowers are asked to provide basic data through an automated application that can qualify you within minutes. The great part about most online lenders is that you can qualify with little to no assets and the approval isn't based on credit scores.
Most loans work like a line of credit, you can draw as much as you need and up to the credit limit. And then, you only pay fees on the amount of money you withdraw.
Here, you'll be putting your business' equipment and inventory or other assets up for collateral. Most asset-based loans are structured such as a revolving line of credit.
These types of loans are good for small and mid-sized companies that are stable with financial assets. Accounts receivable are usually the main collateral for an asset-based loan.
Accounts Receivable Financing
Also known as invoice factoring, this method of borrowing allows you to borrow against your invoices. The loan company will advance a percentage of outstanding invoices to you and then collect the remaining balance from your clients. You will also be paid a portion of the collections after fees.
This form of financing works similarly to a line of credit allowing you to draw on funds that will soon be paid. Generally, you can ask for up to 80% of the value of your eligible receivables.
Equipment Financing Loans
Sometimes all you need is a little extra cash for equipment. That's where equipment financing loans come in.
You can find flexible terms from 2-5 years with monthly, quarterly, or seasonal payments and rates starting at just 4.5%.
You can use these loans for construction equipment, manufacturing equipment, commercial vehicles, and technology in amounts up to $250,000.
Equipment financing loans are quick and easy to apply for, requiring only an application and bank statements. Funding can be available in as little as 24 hours.
Working Capital Loans
A working capital loan is designed to help with cash flow needs. There are not many if any restrictions on how you can use the funds from this type of loan.
A working capital loan is a quick and easy option for businesses looking to cover expenses and infuse cash into the company. Terms are flexible and cost-effective so you can focus on your business' needs.
Remember that working capital loans are not used to buy long-term assets or investments. They should be used for accounts payable, payroll, seasonal fluctuations, advertising or to pay off debt. These loans are meant to help keep your business running smoothly during slow times or during growth and expansion.
Loans For Contractors
Now that you know the different types of loans for contractors, you can make the most educated decision pertaining to your business' needs.
It's smart to perform research before diving into the first loan you can get your hands on. Make sure the terms and conditions fit with the future of your business, not just the now. No matter what's happening in the future, you'll be paying on these loans.
When you're ready to secure quick financing, or if you have further questions, contact us. We specialize in loans for contractors!
Here are some resources just for you.