Many business owners in the construction scene are looking for ways to secure capital without going through rigorous loan applications from traditional lenders. Some finance experts predict that business owners may have difficulty getting a loan, especially if they incurred significant financial loss during the COVID-19 pandemic. Business owners might not even consider getting financing from traditional lenders, knowing that losses and unpaid debts have tainted their balance sheets. This makes alternative financing options all the more critical.
ALTERNATIVE FINANCING
Alternative financing allows you to get financial support through various options, apart from small business loans from banks and credit unions. It pertains to any type of financing that falls outside traditional options offered by banks. Before discussing your financing options, let’s talk about why you need more capital for your construction business.
WHY YOU NEED CAPITAL
Construction companies are always in need of capital because they have to invest in heavy machinery, equipment, and tools before starting their projects. Without access to capital, it will be difficult for company owners to make strategic growth decisions, such as hiring more employees or opening more offices.
If you’re a construction company owner, knowing why you need capital before checking out your options is important. Why do you need the money in the first place? Do you think you’re earning enough to carry on debt? The sooner you determine where you will use the funds, the easier it will be for you to find the right loan.
When you’ve identified why your business needs money, it will be easier for your lender to determine whether you’re qualified to get a loan or not. During this process, lenders will help you identify the best type of loan to support your needs. After that, you can use this reference below to know your financing options. While you have various options to choose from, you should consult with finance experts to point you in the right direction.
BEST FINANCING OPTIONS
Equipment financing: Having the right equipment is key to getting the job done when you’re in the construction business. But buying new equipment can be expensive, and sometimes it’s not possible to pay for it all at once. This is where equipment financing comes in. Equipment financing or equipment loan is one of the most preferable types of financing that allows you to purchase or lease new equipment without paying upfront. For companies, this means getting the equipment they need to optimize existing workflows and accomplish construction projects right on schedule.
Business line of credit: A business line of credit functions as a revolving fund, which you can use for unexpected expenses. It serves as your financial cushion for emergencies such as renovating your shop, repairing equipment, mitigating cyber threats, or processing employee payroll when money is tight.
This type of financing allows you to pull out funds from your accounts whenever you need it, then pay it back with interest before they’re due. When your business line of credit is left unused, no interest charges will be incurred to your account.
A line of credit can be beneficial for construction company owners who need funds but don’t want to disrupt their cash flow. It’s what you can use to finance projects without going through the hassle of applying for a loan every time you need money.
SBA 7(a) loans: The SBA 7(a) loan is the most in-demand SBA loan program to date. It’s also the most flexible because you can use it to suffice for short- and long-term working capital needs, debt refinancing, or purchasing new office equipment.
This type of loan is designed to help small businesses secure financing when they might not otherwise qualify for a loan. What’s great about any SBA loan is it’s backed by the government. The SBA may guarantee up to 85% of the loan amount you’ve qualified for, which reduces your risk as a borrower.
Invoice factoring: Invoice factoring is when a construction company sells its outstanding invoices to a third-party company at a discount. In return, the company will receive a lump sum of cash, which can be used to cover various expenses, bills, and debts.
Invoice factoring can benefit your business in so many ways. First, it allows you to free up much-needed cash quickly. Second, it can help improve your cash flow and reduce reliance on credit lines from banks or other financial institutions. Lastly, invoice factoring can also build your business credit score when payments are made on time. This can be helpful when seeking loans or other forms of financing in the future.
Term loans: Having a steady stream of income is crucial for your business. One way to maintain a positive cash flow is by taking out a term loan, which you can use to keep operations running.
A term loan is a type of financing that’s repaid over a fixed period, usually between a few months and 5 years. The repayment terms will depend on the stability and structure of your business, your credit profile, and your purpose for borrowing the loan. The interest rate on a term loan is usually fixed, which means it will not change over the life of the loan.
The main advantage of term loans is that they offer flexibility in terms of repayment schedules and interest rates. This makes them ideal for construction businesses that often have irregular income streams. Business term loans that use collateral to secure funds often have longer terms and lower rates associated with the loan agreement because the collateral offers security for the business term lender.
CLOSING THOUGHTS
Getting financing for your business will go a long way in ensuring its steady and sustainable growth. Before deciding which loan option is best for you, talk to finance experts and lenders. They will guide you through the application process and increase your chances of securing capital with better terms and rates.
About the Author:
Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners. For more, visit www.smbcompass.com.
Modern Contractor Solutions, May 2022
Did you enjoy this article?
Subscribe to the FREE Digital Edition of Modern Contractor Solutions magazine.
