Comprehensive Guide to Loans Available for Builders

From covering upfront material costs to funding new technology, the construction industry faces unique challenges that require flexible – and often substantial – financial solutions. But, with so many options available to the industry, understanding which option is best for your unique circumstances isn’t always straightforward.

The world of builder financing offers a diverse range of options, including traditional loans, government-backed programs, and creative financing solutions. Having a deep understanding of each option is essential for builders who want to make well-informed decisions that align with their strategic objectives.

Loans are not one-size-fits-all. Choosing the appropriate type can determine whether your financial journey will be smooth sailing or potentially challenging. Continue reading for everything you need to know about the types of loans available to builders. Or, if you’re ready to explore the options your business qualifies for, complete our easy application to get started with our team.

Traditional Loans for Builders

When builders seek to finance their business expansions, traditional loans typically form the foundation of their financial strategy. These traditional financing options can offer the significant funding needed for large-scale projects, but they do come with specific requirements and conditions that must be fulfilled.

Term Loans

Term loans are a simple and easy financing option for builders. They offer a lump sum of money at the beginning of the term, allowing businesses to finance particular projects or increase their operational capacity.

The borrower commits to repaying the principal amount along with interest, usually through monthly payments over a specified duration, which may vary from one to ten years, depending on the loan’s terms.

Ideal for:

• Long-term investments such as purchasing real estate or heavy machinery.
• Large-scale construction projects that require significant capital outlay.
• Businesses with predictable cash flow that can accommodate regular repayment schedules.

Business Lines of Credit

A line of credit offers builders flexible access to funds up to a certain limit, which they can draw upon as needed. Unlike a term loan, you only pay interest on the amount you use.

After repaying the borrowed amount, your credit limit is replenished, much like a credit card, which allows builders to manage fluctuating capital needs and one-off expenses.

Ideal for:

• Managing day-to-day expenses such as payroll and purchasing materials.
• Bridging gaps in cash flow during off-seasons or between projects.
• Immediate access to capital in response to unforeseen expenses.

Builder Financing

Specifically tailored to the construction industry, builder financing can include new construction loans for building new structures or development loans for large projects like housing subdivisions.

Ideal for:

• Businesses planning to build structures or new developments
• Builders that require specialized financing due to unique operational processes

Choosing the Right Traditional Loan

Selecting the right loan involves assessing the specific needs of your business and the project at hand. Consider the following when choosing a traditional loan:

• Interest Rates: Securing a loan with the most favorable interest rates can significantly reduce the cost over time.
• Repayment Terms: Longer terms can reduce monthly payments but increase the total interest paid.
• Funding Speed: Some projects may require immediate funding, while others might allow for a longer lead time.
• Lender Reliability: Choose reputable lenders who offer transparent terms and have experience funding construction projects.

Builders should carefully evaluate various lenders and loan offers to identify the terms that best align with their financial situation and project requirements. Choosing the appropriate financing option is crucial for meeting operational requirements and driving sustainable long-term growth.

Government-Backed Loans for Builders

Government loans often offer advantageous terms, including lower interest rates and extended repayment periods, to assist small to medium-sized businesses. Here are the most prominent options available to builders:

SBA 7(a) Loans

Offered by the Small Business Administration (SBA), the 7(a) loan program is widely recognized as the most popular and easily accessible form of SBA financing for builders. These loans are commonly utilized for acquiring real estate, growing a current business, or securing working capital.

Interest rates vary based on the size and term of the loan but are generally lower than most other loans. Businesses can borrow up to $5 million through the 7(a), with terms that extend up to 25 years for real estate and 10 years for equipment.

Ideal for:

• Acquiring land or existing buildings.
• Long-term real estate investments.
• Refinancing existing business debt under more favorable conditions.

CDC/504 Loan Program

The CDC/504 loan program is specifically designed to finance major fixed assets, such as real estate or large equipment, that promote business growth and job creation. Loans are usually structured so that the business contributes 10% of the total amount, while a private sector lender, such as a bank, provides up to 50%. The remaining 40% is often covered by a Certified Development Company (CDC).

Interest rates are fixed and based on the current market rate for 5-year and 10-year U.S. Treasury issues.

Ideal for:

• Purchasing buildings or land.
• Purchasing long-term machinery and equipment.
• Renovating existing facilities or constructing new facilities.

Disaster Loans

The SBA offers disaster loans to help businesses repair or replace property damaged or destroyed in a declared natural disaster. These loans are also available to businesses that have suffered economic injury due to such a disaster, ensuring they have the necessary funds to return to normal operations.

Ideal for:

• Rebuilding physical damages to premises or equipment.
• Bridging the economic gap caused by temporary business closures.
• Covering operating expenses until normal operations resume.

Choosing the Right Government-Backed Loan

Selecting the right government-backed loan involves:

• Evaluating Project Needs: Determining which loan program best matches the specific needs and goals of the project.
• Understanding Eligibility Requirements: Each program has specific requirements that must be met, which can include the size of the business, operational history, and the purpose of the loan.
• Preparing Necessary Documentation: Thorough preparation can significantly streamline the application process. This includes business plans, financial statements, and projections that demonstrate the potential for growth and profitability.

Innovative Financing Solutions for Builders

Outside of traditional avenues, innovative financing solutions provide flexible, timely, and often cost-effective ways to fund operations and expansion without the stringent terms that characterize traditional loans.

Revenue-Based Financing

Revenue-based financing offers a lump sum of capital to businesses in exchange for a percentage of ongoing revenue. The repayments are flexible and aligned with the company’s revenue streams, so they rise during high-sales periods and fall during slow periods, allowing for greater cash flow management.

This option funds fast and typically doesn’t require collateral, making it an attractive option for businesses with immediate capital needs.

Ideal for:

• Short-term cash flow management.
• Bridging gaps in project financing.
• Investing in marketing or expansion efforts without diluting ownership.

Equipment Financing

Equipment financing is designed specifically for the purchase of new or used machinery and equipment. Builders can finance the entire cost of equipment, which then serves as collateral for the loan, making it a safe and easy funding option.

This type of financing comes with fixed interest rates, predictable monthly payments, and potential tax benefits under the Section 179 deduction.

Ideal for:

• Upgrading or purchasing new construction equipment.
• Expanding operational capacity with additional machinery.
• Replacing outdated or inefficient equipment.

Invoice Financing

Invoice financing enables businesses to access capital by leveraging the value of their unpaid invoices. This can offer immediate working capital to sustain operations and foster growth, eliminating the need to rely on timely client payments.

Ideal for:

• Managing payroll and supplier payments during project completion phases.
• Investing in new projects while awaiting payment on completed ones.
• Smoothing out seasonal fluctuations in cash flow.

Subordinated Debt

Subordinated debt, or Sub Debt, is a flexible revenue-based capital solution that falls after senior financing on the balance sheet. Although somewhat complicated, it essentially allows businesses to access additional capital while repaying senior debt, which can help them maintain growth momentum.

Ideal for:

• Builders with senior financing.
• Businesses whose senior lender is unwilling to offer an overadvance.
• Those who find themselves in need of additional capital mid-way through a project.

Comparing Innovative Solutions

When considering these innovative financing options, builders should evaluate the following:

• Cost-Effectiveness: Understanding the total cost of financing, including fees and interest over time.
• Payment Flexibility: Choosing options that provide payment flexibility without endangering the business’s financial health.
• Speed of Funding: Identifying solutions that offer quick disbursement to meet immediate needs.
• Eligibility Requirements: Ensuring the business meets the eligibility criteria for the chosen financing option to avoid application denials.
• Lender’s Reputation: Venturing outside of traditional banks and credit unions means you’re entering a less regulated market. Although most non-bank lenders have their clients’ best interests in mind, there are some shady organizations that you need to watch out for. Check online reviews and, if possible, speak with someone who’s already worked with them.

Comparing Lenders for Builder Financing

Choosing the right lender is just as important as selecting the appropriate loan type. There are three main groups: Banks, credit unions, and non-bank lenders.

Traditional Banks

Traditional banks are often the first stop for many businesses seeking loans. They offer a variety of loan products, including term loans, lines of credit, and SBA loans, which are backed by the promise of safety and stability.

Credit Unions

Credit unions offer a unique banking experience, with a focus on personalized service and flexible lending criteria, setting them apart from traditional banks. Still, credit unions often mirror their traditional bank counterparts, with low interest rates and strict eligibility.

Non-Bank Lenders

Non-bank lenders, including online FinTech firms, offer innovative and flexible financing solutions without the need to follow traditional banking regulations. They feature looser eligibility criteria and higher interest rates than banks and credit unions.

Evaluation Criteria to Keep in Mind

When comparing lenders, builders should consider the following criteria to make an informed decision:

• Interest Rates and Fees: The goal is to ensure that the cost of borrowing is competitive and within the business’s ability to repay.
• Repayment Terms: Understanding the term length, frequency of payments, and flexibility in repayment terms can help you make a decision that works for your business long-term.
• Application Process: The complexity of the application process and the speed of funding are important factors, especially for borrowers who need faster funding than others.
• Customer Service: Builders should evaluate the lender’s reputation for customer service, particularly post-loan funding support.
• Lender Specialty: Some lenders might have more experience or a better track record with construction and builder loans.

Step-by-Step Guide to the Application Process

Now that you’re familiar with the array of financing options available to you, it’s time to submit a formal application. It’s recommended that you apply with multiple lenders instead of just one, so you can quickly switch to an alternative option and save time.

1. Gather Financial Documents

Organizing all necessary financial documents is crucial when preparing for a loan application. Your level of preparation demonstrates a strong understanding of business and an ability to anticipate future needs, qualities that lenders greatly appreciate. Important documents to have are

• Business financial statements (profit and loss, cash flow statement, and balance sheet)
• Tax returns for the past two years (both business and personal)
• Business licenses and registrations to prove legality and compliance
• Property documents if the loan will be secured against a business property
• Contract agreements that might impact the business finances

2. Assess Your Financial Health

Prior to reaching out to lenders, it is important to have a clear understanding of your financial situation, including factors like your credit score, any outstanding debts, and your sources of income.

• Credit Reports: Regularly review both personal and business credit reports. Rectify any errors and work to improve your credit scores, as they significantly impact loan terms.
• Debt-to-Income Ratio: Calculate your debt-to-income ratio to evaluate your business’s capacity to take on and repay new debt.
• Revenue Streams: Analyze the stability and trends of your income. Consistent or increasing revenue streams reassure lenders of your business’s health.

3. Develop a Strong Business Plan

Your business plan should articulate the intended use of the funds and demonstrate a strategic vision for growth:

• Executive Summary: A concise overview of your business and the purpose of the loan.
• Market Analysis: Insight into your industry, market trends, and competitive landscape.
• Operational Plan: Detailed account of your business operations, management hierarchy, and logistics.
• Financial Projections: Highlight projected revenues, expenses, and cash flow improvements the loan will facilitate.

4. Choose the Right Loan Type

Understanding various loan types will help you make the right choice for your unique circumstances. This could involve seeking term loans for long-term investments or lines of credit to bridge short-term financial gaps.

• Term Loans: Best for large, one-time investments with fixed interest rates and monthly payments.
• Lines of Credit: Flexible option ideal for managing cash flow fluctuations.
• SBA Loans: Government-backed loans that offer favorable terms for small businesses.

5. Compare Lenders

It’s recommended to apply with multiple lenders and compare offered terms to select the option that best aligns with your operations. You should focus on:

• Interest Rates: Compare fixed and variable rates to see which is most predictable and manageable for your finances.
• Repayment Terms: Look at the length of the loan period and any early repayment penalties.
• Lender Reputation: Research lenders’ reputations to ensure reliability and service quality.

6. Apply for the Loan

Once you’ve prepared all the necessary documents, developed a detailed business plan, and selected the right lender and loan type:

• Submit Your Application: Provide all required documentation and fill out the loan application form thoroughly.
• Negotiate Terms: Don’t be afraid to negotiate the terms of the loan. This can include interest rates, repayment schedules, and any collateral requirements.
• Finalize the Loan: Review the final terms carefully before signing to ensure there are no discrepancies.

7. Utilize the Funds Efficiently

Following the loan’s approval, strategically allocate the funds to the planned areas of expansion to ensure maximum return on investment:

• Monitor Expenses: Keep track of how loan funds are spent. Ensure they are used for their intended purposes to drive growth.
• Financial Management: Continue to maintain a strong bookkeeping and financial management system to manage repayments and fiscal responsibilities.

Explore Your Builder Financing Options with National Business Capital

From selecting the right loan type to working with the right lender, the financial side of your growth plan can complicate the process and fill your plate with responsibility. But, with strategic planning and the right financial partner, securing these funds can be much easier and more straightforward than you might think.

Applying with multiple lenders takes time, effort, and patience, but National Business Capital makes it easy and convenient. With one application, you unlock multiple competitive options within our diverse lender platform, then work with your dedicated Business Finance Advisor to negotiate a contract that best fits your growth plan. We combine speed and efficiency with expert advice to ensure you’re able to grow on schedule.

We’re your Debt Advisory Group. Complete our easy application today to get started with the award-winning team behind $2B+ in financing.