The 5 Best Loan Options for Contractors
With multiple business financing products lenders offer, borrowing money can be an overwhelming experience. We’ve funded thousands of construction business owners.
Here are the types of loans that work best for small business owners in the construction industry.
1. Short Term Loans for Construction Companies
Short-term loans are a traditional financing option with no collateral for contractors. A lender provides a fixed lump sum with a specified interest rate that you pay back to the lender based on set repayment terms.
Advantages of short-term loans:
- Quick funding within 1 to 2 days
- No collateral needed to secure a loan
- Both good and bad credit scores can get approved
2. Business Line of Credit for Construction Companies
Think of a business line of credit as being similar to how credit cards work (with lower interest rates than credit cards). You are approved for a credit limit by a lender with a specified APR. You only pay interest on the amounts of funds you withdraw from your total credit line, just like a credit card.
Advantages of line of credit:
- You only pay interest on funds you use
- Always available to use when a need arises
- Improves your personal credit score in the process
- No penalty for prepaying the balance
Apply for a Business Line of Credit
3. Equipment Loans for Construction Companies
Equipment is the lifeline for all construction business owners. Contractors are always buying or repairing existing ones. With equipment financing, the lender gives you 100% of the loan amount to purchase your equipment. The equipment serves as the collateral needed for the loan. The structure is very similar to getting an auto loan with monthly payments.
Advantages of equipment financing:
- A good credit score isn't a requirement (since the equipment serves as collateral)
- Minimal paperwork needed
- Competitive loan APRs
4. SBA 7(a) and Microloans for Construction Companies
As the holy grail of small business loans, SBA loans are partly backed by the federal government. While interest rates for SBA loans are low, the process of getting one is long and full of lengthy paperwork. Your credit score also needs to be in good shape to get approved. We help construction business owners secure SBA loans if their capital needs are further out into the future.
Advantages of SBA loans:
- Backed partially by the U.S. Small Business Administration (SBA)
- Competitive interest rates
- Can be used for any working capital needs
- Long loan terms
5. Invoice Financing / Factoring for Construction Companies
Contractors are accustomed to having multiple outstanding invoices that are in the process of getting paid. If that's the case for you, invoice factoring lets you get up to 100% of the invoice value from a lender. Factoring is primarily only for business-to-business (B2B) companies. So if your services are geared towards consumers, opt for a short-term loan or business line of credit instead.
Advantages of invoice factoring:
- Instant access to capital without waiting for customers to pay
- Invoices serve as collateral -- no personal guarantee needed
- Approval is based on the credit rating of your customer