Everything You Need to Know About Small Business Construction Loans

What Is a Small Business Construction Loan?

A small business construction loan is a great way for small businesses to finance the cost of building, renovation projects, or any other business expense. Whether you’re in a seasonal slump or just experienced a cash flow disruption, these specialized loan solutions provide construction businesses with access to the funds they need to stay competitive.

There are various small business construction loan types to choose from, each with its own specific benefits and drawbacks. For example, construction equipment financing can help you break down sizeable equipment purchases into more manageable payments, but it often comes with a higher interest rate. On the other hand, construction term loans provide a one-time, lump sum payment that you’ll repay throughout the term outlined by your lender. However, this type of financing may require collateral offerings or a drawn-out business plan.

Small business construction loans are essentially an influx of capital that you’ll repay to a lender on a scheduled basis. They can help you manage costs, afford opportunities, and more, making them a viable—and advantageous—option for any entrepreneur looking to grow. 

How Can I Get a Small Business Construction Loan?

The benefit of your small business construction loan will depend on the type of financing you’ve chosen, the financial information of your business, and the lender you’re doing business with. If you can boast strong financial information, you’ll likely find it easy to secure a construction loan with favorable terms that fit the needs of your unique circumstances. But, as most things are, it isn’t always that easy, especially if you’re working with a bank or credit union.

Banks and credit unions, otherwise known as “traditional lenders,” often carry strict eligibility requirements. They won’t finance specific industries, nor will they budge on requirements for growing businesses that invest their profits back into their operations, which makes it difficult for entrepreneurs to secure a favorable approval.

Online, or “non-bank” lenders, are the opposite. They offer to finance a wider range of industries and carry less restrictive eligibility requirements, but it comes with one major drawback—higher interest rates. While this may deter you initially, it’s more important to focus on what your business will look like after you’ve leveraged the funds to grow rather than get caught up in the cost of your capital.

Marketplaces combine both of these lenders into one centralized platform. With one application, you can apply with both bank and non-bank lenders simultaneously, allowing you to choose the offer that best suits your business and your goals. National is one of these marketplaces, and we’re uniquely capable of streamlining the process to days—not weeks—like with traditional lenders.

Different Types of Small Business Construction Loans

Small business construction loans provide the opportunity to secure the financial resources necessary for larger, more ambitious endeavors. You can use the funds for project costs, like labor and materials, professional services, like engineering and consulting, and equipment purchases of all sizes. Whether you’re looking to expand an existing building, build a completely new facility, or just manage your cash flow during an off-season, there’s a financing solution that can help you accomplish your goals.

Here are a few of the most common types of construction loans:

Term Loans

Term loans are what most people think of when they hear “small business loans.” This type of  loan provides funding in a lump sum payment, which you’ll repay over the term outlined by your lender before you’ve signed the agreement. You can have a fixed interest rate that stays static over time or an adjustable rate that changes with the prime rate, both of which are beneficial for specific circumstances.

Term loans are great for projects where you know exactly how much you’ll need. However, you may need to offer collateral as a method of “securing” the loan, and you might also need to provide your lender with a detailed plan of how you intend to use the funds.

Business Line of Credit

A business line of credit is one of the most flexible small business construction loan solutions on the market. Much like a credit card, you can leverage your credit line on an as-needed basis to cover business-related expenses. Once you repay the amount you’ve drawn, you can take the same funds again, allowing you the opportunity to stay one step ahead of the next challenge.

Business lines of credit are beneficial when you don’t know how much you’ll need to accomplish your goals. If you end up needing more than you expected, you can draw additional funds from your line and manage the payments over time.

Equipment Financing

Equipment financing is key for the construction industry. As you know, the equipment you need to keep up with your competition often comes with a hefty price tag that can stand between you and your business’s full potential. Many entrepreneurs struggle to afford this equipment, but with construction equipment financing, you can purchase the assets you need and break down the payments into a more manageable schedule.

The equipment you’re looking to purchase usually serves as collateral for the financing, meaning you won’t have to worry about risking another critical asset on your balance sheet. While this option does come with higher interest rates on average, the price is negligible if the equipment will serve to increase your revenue, efficiency, or productivity.

Accounts Receivable Financing

Late client invoices can prevent you from starting your next job. But, with accounts receivable financing, you can transform those outstanding payments into cash today.

The process is rather simple: you technically sell your unpaid invoices to a lender in exchange for capital, with a small percentage taken as a fee for the service. Although this won’t yield the full value of your accounts receivable, it’s a way to get the ball rolling if your business comes to a complete stop. Plus, if you can leverage the funds to start on a new contract, you can streamline your cash flow throughout the process and make it easier to meet deadlines.