Top 6 Key Benefits of Construction Financing for Contractors

The construction industry is constantly influenced by a wide variety of factors, from ever-changing economic conditions to material costs, labor market conditions, supply costs, and technological advancements. 

For contractors, this means that having financial flexibility and strategic funding are essential for long-term success, especially considering that inadequate cash reserves are among the leading reasons for failure in the industry.

In fact, according to the Bureau of Labor Statistics, only 56% of companies were still in business three years after being established, and just 17.2% were still in business 22 years later.

In this article, we will share with you some of the main benefits of construction financing for contractors – and how getting the funding you need can help you achieve sustainable growth over time. So, without further ado, let’s get right into it:

What Are the Types of Construction Financing for Contractors?

Before we discuss the benefits of construction financing for contractors, let’s take a look at some of the main types of construction financing available on the market:

• Commercial construction loans

Commercial construction lending offers contractors the opportunity to build or renovate an existing property, covering the costs of labor and materials for the project. They are typically short-term in nature, and are disbursed in stages as different milestones are completed.

Another key characteristic of construction loans is that you only pay interest on the disbursed amount during the construction stage. Once the project has been completed, you can pay the remaining amount in full or refinance the loan to a permanent one.

• Construction lines of credit

A construction line of credit is another financial tool that you have at your disposal as a contractor. 

Among its main characteristics are flexibility (you can draw funds as needed), a maximum credit limit determined by your creditworthiness, and interest rates paid on the amount of money drawn. They are revolving, which means that you can repay them and borrow again.

• Equipment financing

Equipment financing is a great option if you need funding for the purchase of construction equipment. 

It is used exclusively for this specific purpose, allowing you to purchase machinery and vehicles or other tangible assets needed for business operations. Quite often, the equipment itself serves as a collateral for the loan. 

• SBA loans

SBA loans are among the most popular financing options on the market, offering favorable terms for small and medium-sized construction businesses. Backed by the government, they allow you to reap the benefits of construction financing for contractors.

The SBA offers several loan programs, including the 7(a) program, the 504 Loan program, and SBA Express loans, each with its own terms and purposes, like working capital, real estate, and equipment financing.

• Small Business Loans

Small business loans are a financial tool designed to meet the needs of small businesses, from start-up expenses to purchasing equipment or refinancing existing debts – essentially, any business purpose.

The amounts, interest rates, and eligibility requirements may vary, so it’s best to consult with a lender about the specific details. 

What Are the Benefits of Construction Financing for Contractors?

Now that you are familiar with some of the funding options that you have at your disposal, let’s take a look at the main benefits of construction financing for contractors:

1. Better cash flow management

Undoubtedly, one of the main benefits of construction financing for contractors is improved cash flow management. As a contractor, having timely access to funds is essential in an industry where project timelines and payment schedules are often unpredictable.

Construction financing allows you to manage your day-to-day expenses without cash flow interruptions, purchase in bulk, qualify for discounts or better terms as a result, and improve your relationship with suppliers and contractors.

In addition, reliable financing means that you can focus on ensuring the efficient execution of the project without being negatively impacted by financial shortfalls. 

2. Building business credit

Among the most underestimated benefits of construction financing for contractors is building business credit and improving your overall creditworthiness. 

As long as you are making timely payments and being responsible with your credit, you will ensure that you are strengthening the credit history of your business. It demonstrates to lenders that you are financially reliable and they can trust you. 

In addition, regular, timely loan repayments are reported to business credit bureaus like Equifax, Experian, and TransUnion. A history of prompt payments positively impacts the business’s credit score, which is a key factor in determining creditworthiness.

3. Faster growth

Having easy and timely access to funds also means that you can boost your growth and scale your construction business as a result of:

• Less budget constraints – quite frequently, contractors avoid bidding for larger projects because they lack sufficient capital. Construction financing ensures that they have the necessary funds to cover upfront investments for bigger projects.
• Better economies of scale – being able to undertake larger projects often translates to cost savings through economies of scale. For example, you will be able to buy materials in bulk, getting discounts and lower unit costs.
• Improved competitiveness – speaking of the benefits of construction financing for contractors, we can’t forget to mention enhanced competitiveness because you are no longer limited by your current financial reserves.
• Access to new markets – access to financing also means that as a contractor, you have more opportunity to expand into new markets that you previously couldn’t reach because of financial limitations.

In other words, timely access to financing allows you to undertake and complete larger projects, which is essential if you are looking to achieve long-term growth. It establishes a foundation for stability as the business becomes less reliant on smaller, more frequent projects that might fluctuate with market conditions.

4. Risk management

According to a study on business failures in the construction industry, budgetary and macroeconomic issues represent 83% of the reasons why construction companies most often fail. 

Irregular cash flow, caused by the delay between incurring expenses and receiving payments, poses a huge risk to contractors who don’t have the financial cushion to bridge the gap on time.

With this in mind, it’s safe to say that one of the main benefits of construction financing for contractors is more effective risk management. Having access to funds ensures that you will be able to cover costs such as labor, materials, and equipment, even if clients are delaying their payments.

Construction financing is also vital for covering unforeseen expenses, such as material cost fluctuations, changes in the scope of the project, and other unexpected obstacles – effectively reducing the risk of impacting the project’s financial viability.

5. Tax benefits

If you are looking to leverage all the benefits of construction financing for contractors, another thing to keep in mind is that you might be able to take advantage of tax benefits. They include, but are not limited to:

• Interest deduction

As a contractor, if you are borrowing funds for business purposes, you will be able to deduct the interest expense from your taxable income, which will reduce your overall tax burden. 

For example, if you earn $100,000 in a year and have paid $10,000 in interest on a construction loan, you can deduct this $10,000 from your income, effectively reducing your taxable income to $90,000.

• Tax credits for specific projects 

Depending on the project that you are working on, you might be able to qualify for specific tax credits. For example, if your project includes energy-efficient upgrades or renewable energy installations, you might be eligible for state or federal tax credits. 

Tax incentives may also be available from the Federal Historic Preservation Tax Incentives program if your project involves the rehabilitation of historic buildings. 

Other examples include tax credits for green building certifications, low-income housing, and improvements that enhance accessibility for people with disabilities. 

• Depreciation on purchased equipment 

If you are using borrowed funds to purchase equipment, you might be able to leverage another benefit of construction financing for contractors – depreciation on purchased equipment. 

This means that the cost of this equipment can be depreciated over its useful life, effectively reducing your taxable income. Certain tax laws allow you to deduct the full purchase price of qualifying equipment in the year it was purchased. 

• Deductions for improvements, renovations, and project costs

Another tax benefit you might be able to leverage is deductions for improvements, renovations, and other costs associated with your projects (such as materials and labor). To be deductible, the expenses must be for business use.

If the property being improved is used for both business and personal purposes, you may only deduct costs related to the business use portion.

6. Improved business reputation

Reputation is extremely important in the construction industry – it not only leads to more business opportunities from partners and suppliers but also attracts a stronger client base, improving the profitability of your business.

One of the benefits of construction financing for contractors is that being financially capable of handling larger projects establishes your credibility on the market. The construction industry relies heavily on trust and credibility because it involves significant financial investments.

Applying for Construction Financing for Contractors 

If you are looking for the right lender for your commercial construction loan, look no further than National Business Capital. With $2+ billion financed since 2007, multiple awards, and an experienced team of Business Finance Advisors, we have everything you need to find the best financing options for your project.

Are you ready to get started? Apply here.