In construction, your top priority is to land profitable new projects while ensuring timely progress on existing ones. But in the construction industry, it’s common for general contractors to receive delayed payments for completed work.
General contractor loans can help business owners leap over this gap and continue building on this progress.
When working capital doesn’t cover what you need to lay out for new expenses, you’ll have to turn elsewhere for funding. Here’s what you need to know about qualifying for, obtaining, and using general contractor loans.
What Is Contractor Financing?
Contractor financing, also known as general contractor loans, refers to a financing option designed for construction businesses.
These loans provide contractors with the necessary capital for expenses like payroll, materials, and equipment. They are tailored to accommodate the unique cash flow and project timelines of the construction industry.
In other words, they give you the cash you need to pursue new opportunities and pay employees while awaiting payments in your contracting business.
As a product of the industry, most general contractors don’t receive payment until up to three months after completing a project.
While this delay might be common, it also makes it difficult to take the next step forward in your business. Cash flow shortages can also make managing day-to-day expenses in your business challenging.
That’s where general contractor loans come into play.
By getting extra cash on hand, you can cover the expenses necessary to keep things moving and take your business to the next level.
How You Can Use General Contractor Loans
Even though you’re managing a building project on behalf of somebody else, it’s your job as the general contractor to cover expenses upfront. To do so, you need cash on hand.
General contractor loans help give you the cash you need to cover all the expenses you might incur while operating your business.
While some products may have restrictions, you can often use cash to cover the following:
- Payroll
- Building materials and supplies
- Insurance policy costs
- Unexpected project complications
- Bidding on new projects for the future
- Getting bonds to cover potential issues
- Buy new equipment (or update old machinery)
Overall, though, contractor loans are frequently used to cover payment gaps.
Some general contractor loans may have restrictions regarding how or when to use them. However, most afford you lots of flexibility when it comes to covering new costs.
Related: How to apply for a contractor business loan?
What Are the Terms of General Contractor Loans?
General contractor loans can vary when it comes to terms depending on the lender, the type of loan, and your creditworthiness – as well as the specific characteristics of your construction project.
- Loan amount – Can range from $10,000 to several million dollars
- Interest rate – 4%-15%, depending on the loan amount and your credit history
- Repayment term – 3 months to 3 years for short-term loans and up to 15 years for long-term loans
- Collateral – Can include business assets, equipment, or future receivables
- Fees – There may be origination fees, processing fees, or prepayment penalties
It’s important to keep in mind that, on some occasions, you may have to provide a personal guarantee, especially if you are a small business. This means that you will be personally responsible for repaying the loan if the business is not able to.
What Are the Requirements for General Contractor Loans?
The requirements for general contractor loans may vary depending on the type of loan you’ve chosen, as well as the lender you are applying with. However, they most commonly include:
- Financial statements, such as balance sheets, income, and cash flow statements
- Good credit score, both personal and business; ideally, above 680
- Recent bank statements, usually for the last six months to a year
- Strong business plan, outlining the viability and characteristics of the project
- Up-to-date contractor licenses and permits, if applicable
- Builders risk or another type of insurance, depending on the project
Another requirement that many lenders request is to be able to demonstrate experience in the industry, especially if you’ve successfully completed similar projects in the past. A good and experienced team, as well as an impeccable reputation, can make a huge difference.
Related: Business line of credit for contractors
The Top General Contractor Loans You Can Apply for
Which general contractor loans make the most sense for your construction business? The answer might not be that simple—but you don’t have to look too far to find the right information.
Interest rates can vary based on the product as well as a number of details about your business.
These are the most popular loan options for construction companies.
Small Business Loans (Term Loans)
When you receive a small business loan, you’re getting a set amount of cash to finance your business. Like many other general contractor loans, this cash can be put toward anything you need in your business.
If you simply need cash to put toward various expenses and everyday costs, then this may be the best option.
After receiving a small business loan, you’ll pay back the loan over a set period of time, which is determined at the beginning of the term.
In many cases, you won’t have to secure the loan with collateral, such as your home or a piece of equipment. However, you may have to personally guarantee the loan. This simply means that you’ll be required to repay the loan in the event you default on it.
SBA Loans
One of the most popular financing options across industries, SBA loans give you large amounts of cash at a low rate. You can also qualify for a longer term, meaning you won’t be required to pay your SBA loan back right away.
This is made possible by the Small Business Administration, a government agency that backs the funding that lenders give.
While this can be an appealing option, it’s important to remember the hurdles involved in the SBA process.
Often, waiting to receive an approval for your SBA loan application can take over a month. It’s not uncommon for business opportunities to disappear during this waiting period.
Qualifying for an SBA loan can also be quite difficult. In addition to a strong financial profile, you’ll also need an excellent credit score.
How to qualify for an SBA Loan?
Equipment Financing
Another option you have at your disposal if you are looking for general contractor loans is equipment financing. If your new building project requires an expensive crane or your existing equipment isn’t up to snuff, then it might be time to consider equipment financing.
While it’s not technically a loan (it’s actually considered financing), equipment financing gives you the power to purchase new machinery outright without taking the full brunt of the cost upfront. Instead, you can maintain some of your working capital for other costs.
Through most lenders, you can make small daily or weekly payments to cover the equipment’s full cost.
Because the equipment functions as collateral, you don’t need to put your home or any other assets up. You can also write off the full cost of the equipment in year 1.
Unlike equipment leasing—in which you make monthly payments and rent the equipment—the equipment belongs to you. At the end of the term, you can choose to keep it, sell it, or rent it yourself.
Business Line of Credit
What if you know you need additional cash to cover expenses, but you’re not sure just how much?
A business line of credit is the perfect general contractor loan (though it’s also a financing option, not a loan) when you need flexibility.
You’ll qualify for a set amount of cash and can gradually draw from that as you go. Additionally, you’ll only pay interest on what you take rather than what you qualify for.
Let’s say you qualify for a total of $100,000 but only need $25,000 at the moment. You can draw $25,000 now and begin paying it down. If you need additional cash later on, you’d draw that cash as well.
In a pinch, a business line of credit can be the best tool available to your fast-moving business.
Accounts Receivable Financing
Through accounts receivable financing, you can use your last customer to bring on the next one. By selling outstanding invoices to a financing company, you can receive the cash you need to push your business forward right now.
Unlike a merchant cash advance—in which you’re getting funding based on future sales—accounts receivable financing gives you cash based on invoices you’ve already sent.
Through this method, you can sell just one invoice or several—it’s up to you. Either way, you’ll receive funding right away.
When you work with a trustworthy lender, you can rest assured that your sale of the invoice will remain private.
How to Get a Loan as a Contractor
Unfortunately, bank loans aren’t always a possibility due to sky-high standards and long turnaround times. However, there are other ways you can get general contractor loans.
Fintech lenders (also called alternative lenders) offer fast financing, meaning you could have the money deposited in your account in less than 24 hours.
While banks will require a credit score of at least 680, most fintech lenders will have options for all credit scores. To qualify, you’ll need to generate around $500,000 in annual sales.
Alternative lenders offer a faster and easier process when it comes to paperwork, too. You’ll only have to submit bank statements and potentially a tax return instead of a laundry list of other documents.
Related: Fast Business Loans
Learn Your General Contractor Loans Options in Minutes
At National, we understand that the right financing option could be a game-changer for your business. That’s why we do all we can to ensure that we find the best solution for you.
Through our diverse lender platform, we find the best financing programs on the market and help you understand which options might work best for your business. Because lenders are competing for you, you can access the best rates, terms, and amounts.
A dedicated Business Financing Advisor will be there to help you through the process every step of the way.
To get started learning your options, apply now!
Frequently Asked Questions
What are the interest rates of general contractor loans?
The interest rates for general contractor loans vary widely, typically ranging from around 4% to 15% or higher. These rates depend on factors such as the contractor’s creditworthiness, the specifics of the construction project, the loan amount, and the prevailing market conditions.
Higher-risk projects or borrowers with lower credit scores may face higher interest rates.
How long does the approval process take?
The approval process for general contractor loans can vary, typically taking anywhere from a few days to several weeks. This time frame depends on the lender, the complexity of the loan application, and how quickly the applicant provides the necessary documentation and information.
For more straightforward cases, some lenders may offer expedited processing.
Are there any prepayment penalties for general contractor loans?
Prepayment penalties for general contractor loans depend on the lender and the specific loan agreement. Some loans may have penalties for early repayment, as lenders lose out on expected interest earnings.
It’s crucial to review the loan terms or inquire directly with the lender about any prepayment penalties before proceeding.
What happens if the project goes over budget?
If a construction project goes over budget, the contractor must address the funding gap. This can involve negotiating additional financing or a loan extension with the lender, using personal or business reserves, or scaling back project aspects to reduce costs.
Effective communication with stakeholders is key.
Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from National Business Capital and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.
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