We help a lot of contractors buy equipment….A lot of the time, the folks we are helping are purchasing equipment they’ll need for a large contract. Have you been in this situation? If so, you know that you’ll have a lot of costs before you get paid at each stage. Hopefully you get paid right on time.. but we both know that doesn’t always happen, right?
But as they say, when the going gets tough.. the tough gets going. So let’s take a look at several ways you can finance your construction business.
1. Bank and SBA Loans for Contractors
You look around on the internet and the “advice” websites, and see some 24 year old in a tie squawking about how to prep your statements to waltz into the bank…Makes you wonder if that person has actually ever sat down with a real small business owner, right?
It would be more funny if it wasn’t such a total waste of your time. The truth is, you can spend up to 25 hours just filling out the paperwork to get a small business loan from the bank or the SBA. After all those hours down the toilet, you’ll often have to wait weeks just to get denied financing.
Many banks won’t even tell you why. Just “sorry.” This is especially true for construction and contracting trades. Banks don’t generally like working with you. It is more risk than they they usually like to take on.
With that being said, if you’ve got stellar credit, good cash flow, and some time on your hands then you will get very competitive rates. Find out your rate here.
If you can probably get bank financing, you should probably go to your bank. But if you are like the rest of us… here are some other options you have available:
2. Equipment Leasing & Financing for Contractors
A lot of the time, we hear from contractors who have just scored a big job. What if you need money for payroll, materials, and equipment too? These should really be set up as two different financing options.
Let’s say you borrow money for payroll, and you don’t pay it back. The money is gone and the lender is not in a good spot. Now, imagine you need a loan for heavy equipment.
If you don’t make payments on your equipment, they’ll take back the equipment. Usually equipment can be auctioned for about half of what it’s worth. That means it is way safer (to the lender) for you to finance equipment than for anything else. Usually, rates will be lower for equipment than other types of loans, and much easier to qualify for.
We can help you with both transactions…
3. Using Equipment To Finance a Construction Project
We often talk to customers about contractor or construction company loans. After asking a few questions, we may find out that you own trucks or machinery.
Remember we just talked about how it’s cheaper to borrow money for equipment than for other reasons? If you own some equipment free and clear, you can say to a lender:
“If I don’t pay, you can take my stuff. In most cases, you will have little problem qualifying to borrow money against equipment.
The process will be fast, and payments will usually be less than if you got an unsecured loan. Often, the structure is set up to save you a bundle on your taxes. Be careful with this one though – there is one key negative. If you get into a little hot water and default on the loan, you can kiss that equipment goodbye.
None the less, this is usually a good option for our clients to secure financing.
4. Using Real Estate to Get a Construction Business Loan
Are we still talking about securing loans with your assets? Yes, but this one will be quick. If you own equity in some land, buildings, or just your house…you can use that equity as collateral in much the same way as for equipment. (Be super careful with that whole “putting up the house thing” though….)
The same rules apply as we just talked about… way easy. The process takes a tiny bit longer than if you just used a dump truck or something to secure the loan, but it’s still just a week or two.
Note: The rates on both types of asset-back loans we just spoke of can be very reasonable or somewhat expensive, depending on your credit score.
5. Contractor Financing With Daily Withdrawal Loans
This is an expensive option tailored to clients that can’t qualify for other types of financing.
Let’s say you need to borrow $50k. You might end up having to pay back $65,000 over 6 months. These loans are quoted to make the payments sound small. “Just $520 per day, Monday through Friday.”
How much is that in a month? Almost $11,000. You’ll usually be told there isn’t an interest rate, but the rates on $65k paid back against $50k over six months…ARE 114%. One hundred and fourteen percent.
Now, we can and do sometimes offer these loans. However, we refer to them as the “last resort. We will try every other option – and make sure you absolutely need the money – before suggesting you take on a very expensive loan.
If these are the only loans you can qualify for, we’ll find a solution to make sure it is as temporary as possible and help you fix your credit score Find out what options you have available.
6. Lower Rate & Longer Term Loans for Contractors
When there is a chance you’ll qualify, often we’ll suggest a lower interest rate term business loan to contractors. These loans are much more reasonable than daily-payment models.
Here’s what you can expect:
Typically, these loans are a little bit higher than going to your bank, but unlike at the bank.. you can actually get approved!
- $250k + in annual sales
- Decent credit (typically 625 or above)
- No major negatives (i.e. bankruptcy, tax liens)
- Profitability – on paper
- 12+ months time in business
These loans can take a week or two to put together, but approval only takes a day.
7. More Expensive Contractor Loans for Bad Credit
There is one problem with some of the options we just mentioned. It’s name is “2008”. Some of you are still repairing your credit from the difficult time the construction industry faced back then. But don’t lose all hope.. there are still some options we can try to keep you out of daily payment loans.
We do help some people get into longer term monthly payment loans.
Here’s the downside:
Rates aren’t cheap. They are lower than the monthly payment loans, but the average is about 27% and up depending on your credit. It’s not all bad, though. The monthly payment will usually range from 1/3 to 1/2 of what would be coming out with one of those cash advance schemes. Also, you can pay it off early and there are no prepayment penalties.
Also, rates are high, but you can pay the loan off early and save interest and finance charges. These loans are never our first choice but they are better than a cash advance.