One of the biggest challenges of running a construction business is obtaining the necessary working capital to meet your overhead expenses and pursue your business growth objectives. While some companies may have sufficient cash flow that they don’t need to worry about their finances, most small construction businesses need some help.
At Select Funding, we provide business financing for small- and medium-sized construction industry businesses, including equipment financing and loans. Since we know that the process of applying for a loan may be confusing or intimidating for some, we’ve created this guide to small construction business loans to help you navigate the process. Here’s what you need to know.
What is a Construction Business Loan?
A construction business loan is a loan provided to a construction company to use for expenses related to the business. A construction loan may be used to buy raw materials and supplies, pay employees and contractors, pay overhead expenses such as rent and utilities, and a variety of other things.
Construction business loans are like any other business loan, with a similar application and approval process. If you own a construction company, you can get a construction business loan from different types of lenders, including financing companies, credit unions, and banks.
We should note that loans and financing are terms that may be used interchangeably in some cases. The one exception is equipment financing, which must be used to purchase business equipment. In construction, equipment may refer to office equipment, furniture, software, vehicles, or construction equipment.
What Can You Do with Construction Company Financing?
Construction equipment loans and financing may be used for a wide variety of purposes related to the company and its operations:
- Attracting, hiring, and onboarding new skilled workers and employees.
- Paying employees.
- Meeting overhead expenses such as rent and utilities.
- Buying new office furniture or decorating your office.
- Buying necessary equipment, including software, office machines, vehicles, or construction machinery.
- Marketing your construction company to attract new clients.
- Smoothing out your cash flow to relieve financial stress.
- Build (or rebuild) your business credit with on-time payments.
As you can see, you can use construction company financing for almost any purpose related to your business and the work you do. Since low or inconsistent cash flow is one of the biggest issues that small businesses face, it makes sense to take advantage of construction financing to help you achieve your growth goals.
What Credit Score is Needed for a Construction Business Loan?
Most lenders will use the personal FICO scores of the business owner(s) to determine their creditworthiness. They may also look at business credit scores.
Traditional lenders typically want to see credit scores in the good to excellent range before they will approve a business loan. Many lenders require a score of 700 or higher. SBA lenders require a score in the mid-600s for approval.
Online lenders have less stringent requirements for businesses. At Select Funding, we require a FICO score of 500 or higher for approval.
What Are the Requirements for a Construction Business Loan or Financing?
The requirements for a construction business loan or construction business financing vary depending on where you go for the loan and what the lender wants to see.
Bank or Credit Union Loans
Banks and credit unions have the most rigid requirements for business lending. Here are the minimum requirements for most lenders in this category:
- A personal FICO score of 680 or above
- A business credit score of 80 or above
- Business bank statements
- Business financial statement
- Business profit & loss statement
- Personal & business tax returns
- Debt-to-income ratio of 43% or lower
- Debt service coverage ratio of 1.0 or higher
- Other business documentation: EIN, business plan, business licenses, payroll records, proof of business insurance, etc.
The underwriting process in traditional lending from a financial institution may be time-consuming and it involves a deep dive into your business and its finances.
SBA Loans
Small Business Administration (SBA) loans have different requirements than traditional bank loans and can range in amounts from $500 to $5.5 million. There are several SBA lending programs, so here’s an overview of the general requirements:
- The business must operate for profit
- It must do business in, or plan to do business in, the United States or its territories
- It must have reasonable owner equity to invest
- The business must have exhausted other financial resources before applying
The terms of an SBA loan are negotiated between qualifying businesses and SBA-approved lenders, so they may vary. However, it’s a safe bet that you’ll need a credit score of 660 or higher, a DTI of 43% or lower, and documentation of your business and personal finances as outlined above.
Select Funding
Select funding is an online business lender with decades of experience providing financing to construction companies. Our requirements are simple by design because we want to help business owners achieve their goals:
- In business for six months or more
- A FICO score of 500 or above
- $10,000 per month in business deposits
- 3 months of business bank statements
With these requirements, many if not most small construction companies can qualify for either small business financing or equipment financing with us.
What Are the Repayment Terms for Small Construction Business Loans?
Business loans are a lot like personal loans in that they are a form of installment credit that requires regular monthly payments according to the loan agreement. Here are some examples of construction loan terms:
- Bank or credit union loans: 7 to 10 years
- SBA loans: up to 25 years with good credit
- Microloans: up to 7 years
- Equipment loans/financing: up to 10 years
Your monthly payment will be calculated based on the loan amount and your interest rate. Keep in mind that you’ll qualify for a lower interest rate if you have a good to excellent credit score than you would with a poor or fair credit score.
How Will Getting a Construction Business Loan Affect Your Credit?
One of the most common questions we are asked about business loans and financing is whether they will impact your personal credit. That’s a natural question to ask considering that we (and other lenders) look at your personal FICO score during the qualification and approval process.
The first thing that may impact your credit is the credit inquiry. If you go through a prequalification process before officially applying for a loan or financing, the lender will do a “soft” credit inquiry that won’t impact your personal credit score. During the underwriting process, they’ll do a “hard” inquiry that will drop your score by 5-10 points. FICO allows for a 14-day shopping period, so as long as you apply with multiple lenders during that time, you’ll only be penalized for one hard inquiry.
If your business is incorporated and you separate your personal and business finances, your small construction business loan will not appear on your personal credit report. The only exception is if your construction loan lender requires you to sign a personal guarantee as part of your loan contract. With a personal guarantee, you accept personal responsibility for the business debt in the event your business should fail or default on the loan. In that case, it would impact your personal credit.
Pros and Cons of Small Construction Business Loans
Here are some of the most important pros and cons of taking out a small business loan for your construction company.
Pros
- There are many lending options for small businesses, including bank and credit union loans, SBA loans, and online loans and financing.
- In many cases, the interest rates for business loans are significantly lower than credit card interest rates, making them a more cost-conscious option than using a card.
- It’s sometimes possible to get a business loan even if your personal credit is less than perfect.
- You can get loans ranging from less than a thousand dollars to $5 million or more, depending on your needs.
- The money from a small business loan may be used to pay overhead expenses, hire and train employees, redecorate your office, meet payroll, buy raw materials or business supplies, or even to buy business equipment ranging from software to heavy machinery
Cons
- It may be difficult to get an affordable interest rate or favorable terms if your personal credit isn’t good.
- You may be required to provide collateral to back your loan or sign a personal guarantee to protect the lender in the event your business fails or defaults on the loan. If you provide collateral, you run the risk of losing your collateral in the event of a default. With a personal guarantee, there may be an impact on your personal credit and finances.
- Some lenders prefer to loan money only to established businesses with a good track record. It can be difficult to qualify for a loan or any type of business financing when you’re just starting out.
For many construction business owners, getting a loan can provide the necessary working capital to pursue their growth goals and turn their business into a success story.
Get a Small Construction Business Loan to Meet Your Business Goals
If you own a small construction business, you may find that uneven cash flow can cause problems, particularly during slow times. Getting a construction business loan can help you get the working capital you need to hire skilled workers, buy necessary supplies and equipment, and provide your clients with the best possible results.
Do you need a small construction business loan for your company? Select Funding can help! Click here to read about our financing options for construction companies and begin the qualification process today.
