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.
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.
Construction equipment loans and financing may be used for a wide variety of purposes related to the company and its operations:
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.
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.
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.
Banks and credit unions have the most rigid requirements for business lending. Here are the minimum requirements for most lenders in this category:
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.
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 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 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:
With these requirements, many if not most small construction companies can qualify for either small business financing or equipment financing with us.
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:
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.
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.
Here are some of the most important pros and cons of taking out a small business loan for your construction company.
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.
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.