Even the most successful construction businesses encounter financial difficulties. They may need to pay for damaged supplies, cover damages to a construction site or pay to replace stolen equipment. When large expenses are too much to pay out of pocket, it may be time to consider a business loan.
Types of Loans for Construction Companies
For all construction companies, the owner’s business credit history and income are both major components of choosing a type of funding. Since construction companies and their income sources are typically considered risky, it is hard to obtain a working capital loan or invoice factoring financing. These are some of the most common loans used by construction companies.
Equipment Financing
Construction companies can use equipment financing to purchase new equipment. This is a short-term loan that comes with a moderate interest rate. It is best to plan on repaying an equipment financing loan within a month or two.
Small Business Loan
For construction companies needing a considerable sum of money and a longer repayment term with a reasonable interest rate, this is a good option. It is a secured loan provided by private lenders and backed by the government.
Merchant Cash Advance
A merchant cash advance provides money immediately for financial emergencies. These loans are meant to be short-term solutions and do not come with long-term payment arrangements. Since income is used for approval instead of credit, business owners with marginal credit can gain approval.
Line of Credit
With adjustable interest rates typically staying below 10 percent, this is a good option for larger purchases and longer repayment terms. A line of credit can be secured or unsecured. Business owners need decent credit and proof of income or collateral to be approved for a line of credit.
Construction Business Loan Obstacles
The biggest obstacle construction businesses face when seeking financing is that the nature of the business is considered a risk. Construction businesses often wind up paying for injuries of subcontractors, faulty work and damaged sites. Having good insurance for finished and unfinished work sites, subcontractors and equipment helps overcome this obstacle. A short business history and unreliable income are both problematic obstacles as well.
Qualifying for A Construction Business Loan
Having proper insurance greatly improves approval chances. To qualify for the best possible financing, construction business owners must have been in business for more than 6 months. It is also important to have an income greater than $8,000 per month. If these criteria are met, getting a business loan is more feasible.
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