Construction contractors often experience uneven cash flow. The business is highly seasonal — lagging during the winter and then picking up in the summer.
Bidding for projects is extremely competitive. Those who have enough working capital to start the job right away have an edge on cash-poor companies. If the bid is accepted, the client usually puts down a deposit on the total anticipated bill. But that lump sum doesn’t come right away and usually won’t cover the costs of the project.
That’s where outside financing comes in.
Contractors face a mix of milestone payments and unexpected costs. They need to fund payroll, equipment, supplies, subcontractors, insurance and the inevitable downtime before the client submits the full payment. Maybe they want to reinvest in their business or buy out a competitor.
And having cash on hand can help contractors negotiate with suppliers, promising upfront payment in exchange for better prices.
Here’s a primer on how to land the financing to keep a contracting company afloat and operating smoothly.
Should I try my chances with a bank?
Banks aren’t known for small business lending — what they recoup from interest generally isn’t worth the effort and risk required to underwrite the loan in the first place. And securing a bank loan requires good credit, plenty of collateral, no history of bankruptcy, business experience and of lots of time.
The approval and funding process for conventional financing takes at least a month usually. Contractors don’t have that luxury — they’re expected to hit the ground running once their bid is picked.
Contractors working on larger projects must also be bonded — that is, have a third party ensure that the contract obligations will be fulfilled. Bonding companies often hold priority lien on accounts receivable, which makes many banks skittish.
Still, a bank loan is worth a shot — traditional financial institutions tend to offer the most generous terms and lowest rates among lenders.
Online business loans are much easier and faster to get than bank loans, though they come with higher rates.
Kabbage, for example, offers construction contractor loans of up to $100,000, with 6- to 12-month terms. Borrowers provide basic data through an automated application and can qualify within minutes, achieving peace of mind without the red tape, according to the company. Debtors must pay a percentage of their withdrawal amount to Kabbage.
For more options, check out our reviews of business loan companies.
Small Business Administration options
This government agency partners with lenders to guarantee loans up to a certain amount. Some of its programs are well suited to contractors and, like banks, tend to feature cheaper and more generous loans. But underwriting requirements are strict; approval rates aren’t high; and it can take months to process a loan. SmartBiz is an online lender that specializes in SBA loans and can cut down funding time to a few weeks.
The SBA’s CAPLines program involves five revolving lines of credit — largely funded through community banks — to give contractors and subcontractors the flexibility to finance their cash flow over terms of up to five years.
Borrowers can apply for the seasonal line, the contract line, the builders line, the standard asset-based line or the small asset-based line. The latter has a maximum $200,000 loan amount; the rest enjoy SBA guarantees of up to $3.75 million.
Contractors also tap a host of other financing sources, though many should be seen more as a short-term solution because of their high rates and lender-friendly terms.
There’s asset-based financing, in which borrowers put up their equipment or property as collateral.
Equipment leases are also popular in the industry because they free up cash for operating expenses and are also tax-deductible. Aerial work platforms, excavators, and other construction machinery represented 11.5% of new equipment financing in the U.S. in 2015, according to the Equipment Leasing and Finance Association. Balboa Capital, for example, provides up to $250,000 in small business loans and equipment financing with no collateral required.
Accounts receivable financing, which is also known as invoice factoring, allows contractors to borrow against their invoices. The tactic draws out capital trapped in unpaid debts. The factoring company advances the contractor’s a percentage of outstanding invoices, then collects what is owed from the contractor’s clients. The contractor is then paid a portion of the collections. Funbox, for instance, charges a flat fee per week (0.5% to 0.7%) that is based on the original invoice value.
Business credit cards can help with immediate expenses, such as materials purchases. Look into some card options here.
For contractors willing to give up a measure of control, equity financing could be helpful. But selling an ownership stake to boost working capital can be complicated and time-consuming.
The Bottom Line
Dealing with the feast and famine cycles of the construction industry is not easy. Having access to flexible financing options can make the difference between getting a contract or filing for bankruptcy.
Online lenders and alternative business financing providers offer competitive rates and flexible eligibility requirements to small businesses in need of capital. Check SuperMoney for expert reviews and consumer feedback from borrowers like you on the leading business loan providers.
Tiffany Hsu no longer writes for SuperMoney. In addition to her work at SuperMoney, Tiffany covered breaking news for New York Times and economic news for The Los Angeles Times. She is a UC Berkeley graduate and earned an M.B.A. from Columbia University.