Understanding how to start a construction company is not enough. You also need to know how to secure adequate funding for your operations. Without it, growth and success will be hard to come by.
Starting or operating a construction business in this day and age is an impressive feat. There are tons of things to consider and important decisions to make.
And if you take a wrong step, you could put your whole business in jeopardy, even before it takes off.
However, if you have access to adequate funding, this task will be easier on you. You’ll be sure to have enough resources to keep your cashflow going.
Delinquent clients or unforseen expenses won’t affect your operations. You will complete projects in time, satisfy your clients, and earn their trust.
And when your clients trust you, they’ll refer you to other leads, which will aid your business growth. All this starts by getting the right funding.
In this article, we’ll talk about the different ways you can finance your construction business.
#1 – Construction Business Loans
These are high interest short-term loans specially tailored to fund construction projects. They often last for a year and cover the expenses incurred during the project. They’re ideal if you’re carrying out major renovations on a property or building a house from scratch.
The application process for these loans is usually straightforward but they’re not easy to secure. You need a good credit rating as well as detailed construction plans. You must have appraised the value of the planned property too.
To boost your chances, sell your project and your company in the application. Write your proposal in an easy to understand manner. There’s no harm in getting an expert writer for this task.
Once you get approved, you’ll get funding in installments based on your project timeline.
Repayment could be in installments or in full at the maturity of the loan. You can also convert it into a mortgage. Everything depends on the initial terms and agreements.
#2 – Small Business Association (SBA) Loans
SBA Loans (also known as SBA 7(a) loans) are the go-to financing option for most construction businesses. They provide funds that you can use to grow your business however you see fit.
These loans are offered by lenders in partnership with the SBA program. The Australian government guarantees the loan in that it co-signs it with you. This means they’ll shoulder part of the repayment in case you default.
However, your business must qualify as a small business under the SBA’s definition to be eligible. The interest rate differs from one affiliate lender to another but it’s often above 10%. The repayment period can vary too although it’s between 5 to 10 years.
SBA loans tend to have more flexible terms and conditions than traditional construction loans. That’s why getting approval is often difficult, especially for those who handle big projects. But if you meet the requirements and write a good proposal, your chances of getting approval are higher.
#3 – Equipment Financing
This is one of the most important business loans for construction companies. This financing option covers expenses associated with acquiring essential construction equipment. This includes forklifts, bulldozers, trucks, and so on.
The good thing about this loan scheme is that it doesn’t require collateral. You get the new equipment and then pay for it with interest over time. Once you’ve completed the payments, the equipment becomes totally yours.
The interest rate for equipment financing ranges between 4% to 40% over a specified period. The application process is usually smooth, with little paperwork required. And you can get approval in as little as 48 hours after submission.
#4 – Revenue Based Financing
Revenue based financing is not a loan per se. It’s an agreement to sell a portion of your future revenue to a lender.
How much you can get depends on how much money you make. Typically, this is about 33% of your annual revenue. The lender will make the funds available to you and you pay it back in the future
To get approved, you need to show the lender your past as well as projected future revenues. You also have to specify how you’re going to use the funds. Revenue based financiers always want to lend money for activities geared towards growth and expansion.
However, think carefully and consider the costs before committing to this type of financing. Understand the loan terms and be sure it won’t hinder your future growth.
#5 – Contractor Line of Credit
A contractor line of credit works just like a business or personal line of credit.
You apply for funds at a lending institution. If approved, you’ll get access to a lump sum of money that you can withdraw from at any time. And you pay interest only on the money that you withdraw from the account.
The amount of money you get depends on your credit rating and capacity for repayments. You also need to show the lender your financial statements and other business documents for approval.
You can use a contractor line of credit to plug holes in your business’ cash flow. They can come in handy in purchasing materials for your next project or paying temporary site workers.
#6 – Invoice Financing & Factoring
This is similar to revenue based financing in that you leverage your future earnings to get money now. But in this case, you get funding solely based on invoices clients are yet to pay.
Here’s how invoice financing and factoring work:
With invoice financing, you use unpaid invoices as proof that you have the capacity to pay the loan. On approval, the lender will provide the loan – usually a percentage of your unpaid invoices. And you pay the loan when your clients fulfill their obligations and pay your invoices.
But with invoice factoring, you’re actually selling your unpaid invoices to the lender. After giving you the loan, they’ll be in charge of collecting the payment from your clients. When they do, they’ll deduct what you borrowed plus any fees and send the rest to you.
Both options provide funds when clients are yet to pay you and you need money to run your business. Instead of waiting around, you can apply for it, get funding, and then pay later.
However, the interest rates for these financial instruments are often high. Take note of the terms and conditions attached to the funds too.
Get Adequate Financing For Your Construction Business
It isn’t enough to know how to start a construction company. You also need to know how to get sufficient funding for it.
When you have constant access to funds, you’ll easily plug cash flow gaps in your operation. This ensures a timely completion of projects, boosts your status and guarantees business growth.
To make this happen, consider the 6 construction business financing options mentioned in this piece. This way, you’ll get adequate funding when you need it without any hassles.
If you’d like to secure loans for your construction business, we at Unsecured Finance Australia are happy to help.
We offer the best unsecured business loans for your business.
Apply online and you can receive your approval within the next 24 hours.
