Construction Business Loans: Best Small Business Construction Loans

What is a construction business loan?

Construction projects can have a hefty price tag for the customer as well as the builder or construction company. A construction business loan can provide a more affordable option to finance the direct costs associated with building projects.

Can I Get A Construction Business Loan?

You’ll need to meet the requirements set forth by the lender, but if you do, then yes you can get a construction business loan. Construction businesses often face cash flow challenges as projects usually require expensive materials and equipment, not to mention, a lot of labor. As a construction business owner you’ll need to find a way to fund the project since you likely will not be paid in full until it’s complete. Most construction companies will require a deposit upfront and collect the rest of payment when the project is complete. While the deposit can help cover project expenses, it may not be enough. 

Construction business loans are unique, and some are even designed for the specific use of financing commercial and residential building projects. For large projects, you should pursue a loan that’s designed specifically for construction businesses. These loans are typically dispersed in a series of draws as opposed to one lump-sum payment. Clients can also secure construction loans and pay the contractor as payments are disbursed, if they are comfortable with these arrangements.

Because contractors generally have an ongoing need for cash to finance projects, a line of credit helps. Taking out a business line of credit allows contractors access to a revolving line of credit on a regular basis. For example, if your line of credit is for $200,000, you can draw available funds at any time. You will only need to repay what you borrow. Most lines of credit are secured by an asset so interest rates can be low. The risk here is the asset securing the line of credit. Let’s say you use your home (a common choice for small business owners) and a client fails to pay in full for a completed project. You will still be responsible for repaying the money you borrowed. While there’s risk in essentially everything we do, when it comes to borrowing money it’s important to reduce risk as much as possible. In the construction world this can be done with clear contracts that protect the contractor. It can also be done with thorough bookkeeping and collection of payments. If a line of credit isn’t your first choice, there are other options which we will cover on this page. 

How Do I Get A Construction Business Loan?

Chances are if you’re reading this, you’re considering a business loan. It can be overwhelming to figure out where to start. Afterall, you’re an expert at construction, not financing. But, as a business owner, you’ll need a broad skill set or good help to succeed. Here are five steps to take if you’re considering a construction business loan.

#1. Determine why you need financing

In construction, there are many reasons you may need to borrow money. From buying new equipment to funding projects on a regular basis, nail down why you need financing. If you just know that you’re having cash flow issues, that’s not a good enough reason to get financing. Before securing financing of any kind your finances should be healthy and organized. Your intended use of funds will help determine what kind of financing is best. For example, if you need to buy equipment, an equipment loan or a business term loan are two good options. With an equipment loan you can use the equipment as collateral, thus making it easier to qualify. If you default on the loan the lender can seize the equipment. Another example is if you need funds to start a construction business. In this scenario, a microloan or business credit card can help. Once you’ve determined what you need financing for, you can explore types of financing at PrimeRates.

#2. Check requirements (Are you eligible?)

Business loan requirements can vary depending on the type of loan and the lender, but most lenders will consider the following:

• Credit score. Personal and business credit scores can be considered for business financing. Why? They help the lender assess a borrower's creditworthiness and likelihood of repaying the loan. The higher your credit score, the more likely you’ll qualify, and qualify with favorable terms. 
• Collateral or personal guarantee. Some business loans are backed by collateral. Collateral can include, but is not limited to, equipment or a personal asset such as your home. Collateral reduces risk for the lender. If you default on the loan, the lender can seize the collateral. 
• Time in business. Most lenders will require 2 years in business. Although online lenders may only require one year. Online lenders are known for being more lenient than traditional banks. Some may even approve businesses that have been in business six months. 
• Annual revenue. Total annual sales will matter when applying for a business loan. Lenders want to see that you have the ability to repay. 

Before applying for a loan you can check with the lender to find out what basic requirements are required. 

#3. Compare options (Are you getting the best deal?)

While you may be excited to qualify for a loan, don’t jump at the first option, unless you have unusual circumstances and believe you will not qualify elsewhere. At PrimeRates, you can compare business loan offers from multiple lenders with no credit impact. Our secure platform allows business owners to find the best loan deal that’s personalized for their needs and qualifications. Online lenders have higher approval rates than traditional banks so searching online is a smart way to expand your options. 

#4. Gather documentation 

Once you qualify for a loan, you’ll probably need to submit some documentation. Most lenders will request some or all of the following:

• Tax returns (personal and business)
• Business license
• Articles of incorporation
• Bank statements (personal and business)
• Profit and loss statements
• Financial statements
• Business plan
• Office lease 

Before applying you can contact the lender to learn more about requirements and or documentation. 

#5. Apply!

Finally, you’re ready to seal the deal. Once you’ve qualified for a loan and decided to move forward, you’ll need to finish the application process. Upon completion of the application, the lender should have everything they need to generate a final loan approval. Once approved, you can receive a loan agreement to sign to initiate funding the loan. 

Do you need a downpayment for a construction loan?

An average minimum down payment of 20% – 25% can be expected with most construction loans. Depending on the type of loan you may be required to use collateral instead of a cash down payment. It’s important to do your research and select the loan that works best for your situation.

How Can I Use A Construction Business Loan For My Business?

Loans can be used for business purposes. Some loans may have restrictions on how they are spent though so be sure to understand the terms. For example, an equipment loan should only be used for purchasing specified equipment. Other business loans will only specify that funds are used for business purposes. Generally, term loans and lines of credit only specify that funds are used for the business. Determining what you need financing for before applying will help you choose a loan that meets your needs.

Which Loan Is Best For Construction?

Two of the most common options for construction business financing are business term loans and a line of credit. Some contractors may even use both simultaneously. If you need a lump sum of cash, pursue a business term loan. If you need ongoing access to cash on a regular basis, a line of credit may be better. Remember, there are other options too, and some may be best for you and your business. Educate yourself, understand your needs, and be confident about asking questions. The need for financing is something to be proud of. It means you’re growing. It means you are chasing a dream. It means you are committed to making your business succeed. Construction businesses often use financing so thankfully there are plenty of options and resources available. 

Can A Small Business Get A Construction Loan?

Small businesses can get a construction loan. The reality is that small businesses may have a harder time getting a business loan, so they’ll need to know where to look. One of the best places for small construction businesses to get a loan is online. Online lenders have higher approval rates than traditional banks for small businesses. At PrimeRates, we have an entire network of top-rated lenders dedicated to helping small businesses get financing.

What are the requirements for a construction business loan?

Different lenders and loan types can have varying requirements for a construction business loan. Prior to applying you should gather your income and tax records. In addition, you should prepare documentation showing the legitimacy of your business. Taking these steps can help speed up the approval process and increase your chances of approval.

Is a construction business loan a good idea?

A construction business loan can be a good idea as long as it’s managed properly. It can allow your business to grow and revenues to increase quickly.

Pros

• Allows you to buy your own equipment
• Complete more projects, earn more revenues
• Affordable payment plans
• Expand your company faster

Cons

• Taking on debt
• Interest and fees

Options for Financing Your Construction Business

SBA Loans

Small Business Administration (SBA) is a government resource that can provide construction business loans.

Pros

• Very accessible for securing capital
• Helps businesses without collateral
• Works with startups
• Lower monthly payments
• Longer loan maturities
• Typically structured without balloon payments
• Lower down payments

Cons

• Higher interest rates
• More paperwork
• More time is required for documentation and approval process
• Longer funding time
• Loans are often secured with any property owned by the business owner

SmartBiz

» MORE: SmartBiz SBA Loan Review

Revenue-Based Financing

Revenue-based financing can be helpful to startups or unproven business models that need funding. Revenue-based financing can allow companies to promise an agreed-upon percentage of future revenue.

Pros

• No company equity required
• Significant investor funding
• Payments based on a percentage of monthly revenue
• Receive money upfront
• Faster approval time

Cons

• Must have a business portfolio prepared
• Minimum requirements may be difficult to meet
• Lack of regulation
• Some lenders can impose high-interest rate

FundBox

» MORE: FundBox Business Loan Review

Line of Credit

Construction companies can take advantage of credit lines offered by financial institutions. A line of credit can be used for various purposes by the borrower.

Pros

• More permanent funding solution
• Money can be drawn at any time up to the agreed-upon limit
• Ideal for balancing cash flow
• Only pay interest on the amount you use
• Improves business adaptability
• Builds business credit

Cons

• Pay-as-you-go format means fees can add up quickly
• Difficult to qualify for
• Low borrowing limits compared to other options
• Risk for misuse of loan

StreetShares

» MORE: StreetShares Business Loan Review

Commercial Loans

New business endeavors are commonly funded by commercial loans. They can be a good option for small construction businesses that need funding.

Pros

• Lower interest rates
• Flexible options
• Long-term loans often between 3 – 10 years
• Extended payment plans
• Large sums of money
• Unsecured, no collateral required in most cases
• You retain ownership of the company

Cons

• Challenging to qualify for funding
• Excellent business credit is typically required
• Personal financial history required
• Less autonomy than other options

Funding Circle

Funding Circle is another peer-to-peer lending option that highlights credible investors and over $7 billion dollars invested. 

Pros

• Quick online application
• Secured loans
• Transparent terms
• Backed by more credible investors
• Use loan proceeds for almost any business purpose

Cons

• Lien on business assets required
• Personal guarantee from owners required

» MORE: Funding Circle Business Loan Review

SmartBiz

» MORE: SmartBiz SBA Loan Review

Peer-to-Peer Lending

Person-to-person or peer-to-peer lending is an online lending option that connects borrowers and lenders.

Pros

• Generous loan amounts
• Easy and quick online application process
• Fixed interest rates and payments
• No prepayment penalty
• Unsecured loans, no collateral required

Cons

• More ideal for good credit borrowers
• Bad credit borrowers can receive high interest rates
• No government insurance or protection
• Some jurisdictions don’t allow p2p lending

LendingClub

LendingClub is a peer-to-peer lending giant that offers fast-approved loans with reasonable interest rates.

Pros

• Clear terms outlined prior to signing up for a loan
• Well established pattern of service
• 36- or 60-month terms
• Information easily accessible on their website
• Receive pre-approved offer in minutes
• Easily apply online
• Loans usually funded in less than 10 days
• Competitive interest rates between 6 to 30 percent
• Nationwide availability for most types of credit

Cons

• Application process may require copies of tax documentation
• Passes accounts into collection quickly after missed payment
• Unsecured loans only

» MORE: LendingClub Business Loans Review

Upstart

Upstart is a peer-to-peer lending option that can offer funding for construction business loans. Upstart can be differentiated by its unique approval process that considers factors other than just your credit score.

Pros

• Good chance of approval
• Quick funding
• Competitive interest rates between 9.57% – 29.99%
• Generous loan amounts between $1,000 – $50,000

Cons

• Some states have minimum loan amount
• Fees can be costly
• Prepayment penalty can apply

Prosper

Founded in 2005, Prosper was one of the very first peer-to-peer lending marketplaces within the United States.

Pros

• Fixed terms (2-year and 5-year option)
• No early payment penalties
• No minimum income requirement
• No hidden fees
• Easy application process

Cons

• Minimum credit score of 640
• Payment schedule cannot be adjusted
• Maximum loan amount $35,000

Conclusion

Ready to take your business to the next level using a construction business loan? Submit one loan application at primerates.com and get connected to multiple lenders within minutes. Primerates.com allows you to receive more competitive offers, easily compare lenders, and save hours of time. Ready, set, save, and apply today at primerates.com.