Financing for Contractors: What Are Your Options?

Financing for Contractors: What Are Your Options?

July 22, 2019

Being a contractor presents some unique business hurdles, and maintaining a steady flow of cash may be among the biggest challenges. You need capital to pay your employees or subcontractors, cover day to day operating expenses, and purchase the supplies and equipment necessary to complete projects. And you may also have existing business debt that you’re trying to manage.

Fortunately, there are a number of business funding options that can put the capital you need in your hands. Learn what solutions are available to help keep your contracting business running smoothly.

What Needs Can Contractor Financing Meet?

Before digging into financing options for contractors, it helps to have an idea of how you can put them to work. Here are some of the most common use-cases for contractor loans:

construction financing

Buying new equipment

Making sure your equipment is up-to-date and in good working order is critical for meeting deadlines and getting projects completed on time. Contractor financing can help you fund new equipment purchases both large and small, without requiring you to squeeze your cash flow or dip into your cash reserves to cover it.

Purchasing supplies

Having necessary supplies on hand is just as important as having the right equipment and you can’t afford to run short in the middle of a project. Whether you need to buy sheetrock, hand tools, paint or something else, you can use a contractor loan to do it so there are no hiccups in your project completion schedule.

Consolidating high-interest business debt

Running a contracting business comes with a countless number of tasks to manage, and if you’ve taken out numerous forms of debt to cover various costs, a myriad of bills, due dates and interest rates to keep track of. You can use a contractor loan for business debt consolidation, which will make your repayment schedule more manageable, and in some cases, more affordable — especially if you’ve primarily relied on short term financing which tends to come with higher interest rate.

Hiring and training new staff

Your contracting business may have started out with just you at the helm but as you grow, you may need to bring on employees or subcontractors to help handle the workload. With contractor financing, you can get the funding necessary to fill open positions in your staff roster or pay your subcontractors for the work they’re doing.

Managing payroll and other overhead costs

Once you’ve hired staff, you have to pay them and that’s another need contractor loans can meet. You can also use financing to cover other overhead expenses, such as insurance premiums, quarterly taxes, business cell phones and administrative costs.

Advertising and marketing

Word of mouth can help your contracting business become more visible and attract new clients, but at some point, you may decide it’s time to ramp up your marketing efforts. You could use a contractor loan to build out a new website for your business, launch a digital or print marketing campaign or rent billboard advertising space on a monthly basis.

Closing seasonal cash flow gaps

Contracting can be seasonal in nature and you may be busier during certain times of the year than others. When business slows down, cash flow can slow down with it and a contractor loan can help you stay in the black until things pick up again.

Covering emergencies

No matter how well you plan, you’ll likely encounter unexpected costs you need to cover out of pocket that can disrupt your business as usual routine. For example, you  may experience a significant increase in your insurance premiums for the year, or end up owing more in taxes than you expected. A loan can help you manage those kinds of financial curveballs.

Financing for Contractors: What Are My Options?

As far as loan options go, there are several financing options for contractors. Understanding how each type of funding works can help you determine which makes the most sense for your business.

1. Term Loans

Term loans offer a lump sum of funding that’s repaid over a set time period. Lenders may offer short-term loans, intermediate term or long-term loans for contractors. Short-term loans typically have a repayment term of 12 months or less. Intermediate loans can be repaid over 1 to 5 years; long-term loans may extend repayment up to 20 years.

Term loan overview:

  • Borrowing limits may range from $5,000 to $1 million
  • Loans tend to have fixed interest rates, but may be variable
  • Interest rates typically range from 7% to 30%
  • Unsecured term loans are available, but a personal guarantee is often required

What is a term loan good for?

A term loan could be ideal for:

  • Refinancing existing business debt
  • Purchasing real estate or improving property you already own
  • Buying supplies or equipment
  • Hiring and training new employees
  • Expanding your marketing and advertising budget
  • Managing cash flow lulls

2. Construction Loans

Construction loans can be used to finance a project from start to finish. These loans can be used to fund residential and commercial construction on a small or large scale. Construction loans may provide a lump sum of funding, similar to a term loan, or in the case of residential building projects, operate on a draw schedule. With this type of arrangement, loan funding is released periodically as each stage of the projected is inspected and completed.

Contractor financing

Construction loan overview:

  • A down payment of 20-25% of the total cost of the project is usually required
  • The typical range for construction loan funding is $75,000 to $1,000,000
  • Good credit and strong operating history are often required to qualify
  • Draw loans are usually short-term, with repayment terms lasting 12 months or less
  • Interest rates may be fixed or variable

What are construction loans good for?

Here are some of the most common ways to use a construction loan:

  • Purchasing residential or commercial land
  • Funding construction for a custom-built home
  • Financing fix-and-flip projects
  • Funding multi-unit construction projects

3. Equipment Financing

Equipment loans allow you to buy the equipment you need for your contracting business without having to offer business assets as collateral. Instead, the equipment itself acts as collateral for the loan. It’s possible to get up to 100% financing for construction equipment loans, although some lenders may require a down payment to qualify.

Construction Equipment Financing Pros and Cons

Equipment loan overview:

  • Repayment terms can extend for the usable life of the equipment
  • Down payments are typically 10% to 20% of the equipment’s purchase price
  • Interest rates may be lower compared to other construction financing options

What are equipment loans good for?

Depending on the nature of your equipment needs, you could this type of financing to purchase:

  • Bulldozers
  • Concrete mixers
  • Backhoes
  • Scaffolding
  • Generators
  • Paint sprayers
  • Vehicles

4. Invoice Financing / Invoice Factoring

Invoice financing or factoring allows you to leverage your unpaid accounts receivable to secure financing. With invoice financing, you’re borrowing against the value of your outstanding invoices. The financing company gives you a lump sum of funding, less a certain percentage that’s held back. This hold back is then released to you once the invoices are paid, minus the financing company’s fee. With invoice factoring, you sell your unpaid invoices to a factoring company, who then takes over collecting from your customers.

Invoice financing overview:

  • Borrowing limits often range from 50% to 90% of outstanding invoices
  • Fair to poor credit isn’t a barrier to approval for financing
  • Repayment terms are usually 12 to 24 weeks, although some lenders may extend that for a longer time period
  • Funding can be completed in as little as 1 to 3 business days

Invoice Factoring 2

What are invoice loans good for?

Invoice financing is a short-term loan option and it’s more appropriate for:

  • Covering payroll or other working capital expenses
  • Paying for emergency expenses
  • Purchasing supplies or inventory

5. Business line of credit

A business line of credit is not a loan per se; it’s a line of credit you can draw against as needed, similar to a business credit card. Interest rates can be fixed or variable, but you only pay interest on the portion of your credit line you’re using. For the most part, a contractor line of credit can be difficult to qualify for without good credit, and you definitely want to be aware of any hidden fees that are tacked on to the agreement.

Business line of credit overview:

  • Credit lines may range from $10,000 to $500,000
  • Repayment terms may span 6 months to 5 years
  • Interest rates can range from 7% to 25%
  • Funding speed is often quick, with funding available in as little as one day
  • Lines of credit may be secured or unsecured, depending on the line amount, time in business and your credit

What is a business line of credit good for?

The great thing about business lines of credit is that they’re flexible, allowing you to manage many different types of expenses, including:

  • Purchasing inventory or equipment
  • Covering unexpected costs that weren’t included in your initial project budget
  • Managing cash flow due to seasonal fluctuations
  • Working capital expenses

6. SBA Loans

The Small Business Administration partners with lenders nationwide to guarantee loans for contractors and other small business owners. There are three loan programs that may be of interest to contractors: microloans, 7(a) loans and CDC/504 loans. While SBA loans can offer very competitive interest rates, it can take several months to receive funding (if you’re even approved), which makes them less suited to meeting immediate capital needs.

SBA microloan overview:

  • Loans are capped at $50,000
  • Good for funding startup costs
  • Average credit is required to qualify
  • Borrowers need to pledge collateral and offer a personal guarantee

SBA 7(a) loan overview:

  • Loan maximum is $5 million
  • Repayment terms can last up to 10 years for equipment, and up to 25 years for commercial real estate
  • Interest rates can range from 7.5% – 10%
  • Personal guarantee is required for anyone with 20% or more ownership stake in the business

SBA CDC/504 loan overview:

  • Loan maximum is $14 million (for an individual project)
  • Project assets being financed are used as collateral
  • Repayment terms can stretch up to 25 years
  • Interest rates will generally fall somewhere between 4%-6%
  • Personal guarantee is required for anyone with 20% or more ownership stake in the business
  • Loan proceeds must be used to fund a project that results in job creation

What are SBA loans good for?

SBA microloans can be used for any smaller funding need, including startup expenses. SBA 7(a) loans are flexible in usage, and are often used towards financing working capital needs, buying an existing business, refinancing debt, or purchasing new equipment. CDC/504 loans can be used for:

  • Purchasing lot and land improvements
  • Renovating existing buildings
  • Buying commercial or industrial real estate
  • Purchasing big-ticket, long-lasting equipment or machinery

In business, cash is king. Whether it’s to tide you over a tight cash crunch or to finance an expansion, it’s crucial to what financing options are available to contractors, material suppliers, and other construction business owners. 

Samantha is a content marketing writer covering business and finance for Funding Circle.

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