All construction businesses will eventually have to secure a huge capital in order to expand their companies. There are many reasons why business owners in the construction sector might require a bigger capital, from taking on large-scale projects, upgrading their equipment, all the way to renovating their office facilities.
Securing a construction business loan is one of the most popular ways for business owners to have access to the capital that they need. This guide will talk about how you can get approved for a construction business loan, including requirements, qualifications, and other important considerations.
Types of construction business loans
There are many types of construction business loans that you can look into, including the following:
Commercial construction loans
Commercial construction loans are for large-scale projects such as the construction of a commercial business facility or a multi-family residential apartment. These large-scale projects typically require a huge amount of capital to develop, and so most contractors take out commercial construction loans to fund the construction.
Business term loans
A business term loan is a long-term loan that is not specifically associated with a type of project. You may use the money from a business term loan for expenses such as buying new equipment or renovating your office space. When you take out a business term loan, you will be handed a one-time loan amount which you have to pay back over the course of a term, which usually takes 1 to 5 years.
Short-term financing loans
Short-term financing may involve taking a business credit card or a business line of credit. Unlike a business term loan, using a business credit card or a line of credit does not require you to pay a one-time loan under fixed terms. Instead you are given access to a pool of money which you may tap at any time, and you only have to pay back the amount that you have spent.
Construction-to-permanent loans
A construction-to-permanent loan is a specific type of loan in which you only have to pay interest rates during the course of a project. Once construction is done, the loan turns into something like a business term loan in which you have to pay fixed-amount payments over the course of a 25- to 30-year term.
Why take out a construction business loan?
Deciding whether you need to take out a loan depends on different factors and situations, such as the following:
Buying materials and parts for a new project
You may need a construction business loan to fund your new project, especially if you are just beginning to take on bigger-scale projects. If, for example, you will be building a 6-unit multi-family apartment for the first time, you might want to augment your budget so you can buy the materials and parts needed to make that project a success. For instance, there are affordable replacement window financing options if your business needs to finance replacement windows.
Taking out a business loan is one way to pad your capital so you can take on larger projects.
Upgrading your equipment
Sometimes you might also want to upgrade the equipment that you have. Maybe you do not want to rent equipment anymore and you want to invest in new assets. If this is the case, getting a construction business loan is one way to secure the finances needed to purchase or upgrade your construction equipment.
Expanding your business
Expanding your business does not have to mean working on bigger projects – it could also mean improving or remodelling your office space, or even investing in more training for your employees. Seeking out a construction business loan could help you do all these.
Paying your employees
A construction business loan may also be used to pay your staff, especially during economic downturns, when projects are slow but payroll requirements never stop. If you have funding from a construction loan, you may tap into that funding to make sure that your employees are duly compensated and your business stays afloat.
How to qualify for a construction business loan
In general, these are just some of the qualifications that you may have to meet if you are considering applying for a construction business loan:
Build a good credit score
For most lenders, a strong credit score is a good indicator that you are in good financial shape and are worthy of being granted a construction business loan. Keep in mind that lenders are parties who lend you their money and they eventually want to get their money back.
Lenders want to take as little risk as possible so you are more likely to get approved for a construction business loan if you have a good credit score. If your current credit score is on the lower end, work towards improving it by making good financial decisions until your credit score gets better.
However, note that there are also lenders who are willing to overlook a bad credit score, although you may have to pay a steep interest rate in exchange.
Be ready to provide collateral
Construction business loans, especially those that are given by a traditional banking institution, would typically require you to provide collateral. Collateral is an asset that the lender will keep as security in case you default on a loan.
If, for example, you get approved for a construction business loan and you end up short on cash to pay the loan, the lender would have the right to take away the asset that you provided as collateral. Like the credit score, the collateral also protects the lender from the potential risks of investing their money in you.
While some business loans may not necessarily require to present collateral, you will have a higher chance of qualifying for a good construction loan agreement if you have assets that you are willing to provide as collateral.
Have a detailed business plan
Most construction business lenders would want to look at your business plan. If you are applying for a business loan to fund a specific project, they would want to know everything about that project – the people behind it, their expertise and qualifications, the blueprints, the cost estimates, the schedules, etc.
Studying your business plan is the lender’s way of determining if you are actually able to develop the project that you are about to work on. On top of construction business plans, the lender will also look into your company’s financial predictions, specifically how you see your finances faring in the coming years. This way, the lender will be able to tell if you will be in good financial shape to pay back the potential business construction loan.
Prepare to make a down payment
Qualifying for a construction business loan typically involves having the capacity to put down a hefty down payment. Most construction business loans will require you to pay at least 20% of the proposed loan amount. Depending on how much you are borrowing, you have to ready to shell out a significant amount of money to get approved for a construction business loan.
This is why taking construction business loans is recommended for mid-sized to big businesses. Smaller businesses can look into other types of financing such as invoice factoring, or they can also look into Small Business Administration loans that are specific to helping out smaller companies.
Establish a good business reputation
Most lenders typically subject potential borrowers to what is called an appraisal, or an assessment of your project. Appraisers typically analyze the specifications of your project and come up with values for the worth of your project. A good appraisal is key to getting your construction business loan approved.
On top of the appraisal, lenders will also look into your business reputation. Lenders will spend time doing research to gauge your reputation – they will talk to local associations, look at reviews of the subcontractors and vendors that you have worked with, and even base their judgment on your online presence.
If you want to qualify for a construction business loan, it is very important that you have a good project and a good reputation. A good work history and positive reviews from your colleagues and clients could go a long way in getting you approved for a business loan.
Requirements for a construction business loan
Requirements for a construction business loan vary among lenders. Some lenders like banking institutions have very strict requirements, but there are also lending institutions that are more lax and more willing to invest in all types of potential borrowers.
In general, these are just some of the requirements that you might have to fulfill if you want to secure a construction business loan:
Meeting the minimum credit score
Most lending companies would have a benchmark for what credit score they find acceptable or not. Having a strong credit score will definitely increase your chance of getting approved, but a lower credit score does not necessarily bar you from ever picking your business up and securing a business loan.
Providing financial documents
Lenders will, of course, ask you for financial and legal documents. Each lender will ask for different statements and documents, but be prepared to gather important paperwork such as profit statements, tax returns, bank statements, financial projects, etc. These documents are used by lenders to assess a capacity to pay back a potential construction business loan.
Providing collateral
As mentioned, most lenders would require you to provide an asset as collateral in order for you to get approved for a construction business loan. The collateral may be a piece of equipment or a set of equipment, a real estate asset, etc. Your chances of getting approved are higher if you have valuable assets to offer as loan security.
Pitching a business plan
If you are applying for a construction business loan to fund a specific project, you have to pitch a strong business plan. Make sure that you establish your company’s reputation, bring up your companies’ previous works, highlight your employees’ expertise, and be ready to provide contract documents, cost estimates, etc.
What to expect when applying for a construction business loan
Comprehensive application process
While some lenders may have a fast-tracked application process, most lending companies take time to assess and appraise potential borrowers. They look at everything – business plans, financial status, business reputation, etc. – to ensure that the borrower will have the capacity to pay the loan and interest.
Expect to undergo a thorough application process. Your construction business loan application may not be approved right away, so also take into account the processing time in your plans.
Lots of paperwork
You will have to gather and prepare lots of paperwork, from financial documents to contracts to business reports. It would be very helpful if you have a dedicated team focused on keeping your paperwork organized and properly filed.
Large down payment
Construction business loans will typically require you to give a relatively huge down payment, so expect to shell out a sizable amount of cash. Think of this down payment as an investment – in order for your business to grow, you have to spend some amount of money to expand your company.
Things to consider when applying for a construction business loan for the first time
1. Getting the right type of loan
Before you assess whether you meet the requirements for a construction business loan, you must first think about what type of construction loan you want to secure. You may have a higher chance of being approved for a certain type of loan, so look at your possible options and see which one best applies to your situation.
2. Finding a reputable lender
Finding a reputable lender is another important consideration. Note that different lenders have different requirements for approving a construction business loan. If you have a bad credit score, consider looking at lenders who are willing to overlook not-so-stellar credit scores. If you need the money right away, consider looking at lenders who have quick application processes.
You must also assess your lender’s qualifications and reputation before committing to an agreement. Make sure that the lender has good reviews from its clients. Do not be afraid to shop around and check out the different requirements and terms that each lender offers before you make a decision.
3. Assessing your capacity to pay back
Taking a construction business loan is a huge commitment. You have to be certain that this is the best financing option that can best help you in your business goals. There are other financing methods available for construction businesses that you may want to look into if you are still deciding on whether securing a construction business loan is the best way to go.
Further reading