If you work as a contractor, perhaps building homes or remodeling them, you may have large up-front expenses before you ever see a dime from your client. You likely don’t have enough working capital in your bank account to cover these expenses every time, so you need to borrow money to cover them until you get paid.

And sometimes clients take a while to pay, don’t they? That can leave you in a pickle, since you have your own expenses and payroll to cover.

Fortunately, there are several financing options for contracting businesses.

What is Contractor Financing?

Contractor financing includes a range of small business loans and other lending products that help contracting businesses get the capital they need to complete jobs and get paid. These loans improve cash flow by allowing contractors to either access capital at a faster pace or  defer payment for expenses. It’s an alternative funding source for industries that have a much tougher time accessing traditional financing, and are also paid on the back-end of projects once the work is completed.

How You Can Use General Contractor Loan

There are many expenses in your construction business that contractor loans can cover. 

If you are a real estate investor who flips homes, you can use loans like the Small Business Administration’s (SBA) 7(a), to purchase real estate.

As an independent contractor, you can also use these funds for working capital applications like purchasing lumber, paying your staff, or buying equipment.

Generally, you can use contractor loans for any business-related expense. However, be aware that certain types of financing, such as equipment loans, may have specific requirements for what you can use funds for.

Types of Loans and Financing for Contractors

It’s important to carefully consider all your options when it comes to the types of financing you choose for your business. There are several types of loan options available for construction companies and contractors. Below, you’ll find a few options as well as lenders we recommend.

Term Loans

Traditional banks, online lenders, and credit unions offer business loans, with terms anywhere from one year to five. Some may even offer longer-term loans, especially for commercial real estate, so it’s important to look at the varying options and see what can be best for the stage and phase you’re in.

OnDeck is a recommended lender who offers term loans ranging from $250,000 to $500,000, with repayment options up to 24 months.

Another option is Kapitus offers loans of $5,000 to $500,000, with repayment terms of three to 36 months.

SBA Loans

The Small Business Administration (SBA) offers several loans for small businesses.In addition to the 7(a) program mentioned above, they also offer loans specifically for equipment or real estate. The advantage of these loans is their low-interest rate, which will reduce what you pay for financing compared to other options.

You can apply with an SBA lender like SmartBiz to get loans ranging from $30,000 and $5 million, with repayment terms of 10 to 25 years.

Construction Loans

Some lenders specialize in construction loans. These can be short-term loans that are unsecured, which means you don’t have to provide collateral. The idea is that you will finish your project quickly, allowing you to pay off the loan efficiently. 

Equipment Financing

If you need to purchase a work truck or cement mixer, consider equipment financing, which is specifically designed to help you pay for equipment purchases. The equipment you’re financing may also serve as your collateral.

Business Line of Credit

If you don’t need a lump sum of money all at once (with larger monthly payments coming due quickly), a line of credit could be what you need. You’re approved for a certain amount, and you can borrow against that line of credit up to that amount. Only pay back what you’ve borrowed.

Cash Advance

If you have bad credit and don’t qualify for other types of contractor financing, a cash advance may be worth considering. A few things to note: while cash advance companies like Rapid Finance offer advances up to $600,000, the turnaround time for repayment is short: You typically have between three to 12 months to repay the advance. And interest rates may be higher than with other options, ranging from 70 to 250%, which is higher than many other options. That said, they’re useful if you need cash fast and can repay it just as quickly.

Business Credit Cards

If you just need an easy way to make purchases at the hardware store, business credit cards fit the bill. Consider a card that allows you to add other users if you have subcontractors who also need to make purchases for your business, as well as one that lets you earn rewards with every purchase. Just be aware of monthly interest, because it can rack up your expenses quickly if you don’t pay your balance in full each month.

How to Qualify for a Contractor Loan

First, make note of the basic requirements. Each of these options for contractor financing will have certain requirements for you as a borrower, though those requirements may vary from one lender to another. Write down the basic requirements that most lenders look for and how it applies to your business such as time in business, revenue (monthly and yearly), borrowing history (bankruptcies and liens), and your business’ current credit score. This will make it easier to identify what you can qualify for.

Next, know that your business credit score may also be considered depending on the loan type. Banks and the SBA typically have credit score requirements for applicants, while cash advances and equipment financing may not.

If you are new in business, your personal credit scores may also be reviewed, since your business may not have established its own scores. Learn how to establish business credit so that in the future, you can qualify for great rates on business financing.

Lenders may also look at your finances to understand annual revenue and cash flow. This can be an indicator of how risky you would be to lend to. If your revenues are low, or you don’t have much cash flow, it may be a sign that you might not be able to pay back a loan.

Finally, be aware that some loans may require down payment or collateral. For real estate or equipment loans, the property may serve as collateral, but in other cases, you may need to put down cash.

How to Apply for a Contractor Loan

Loan applications may vary from one lender to another, but generally, you can expect to be asked questions about your business details, including time in operation and revenues. You may also be asked for personal information, like your home address and social security number.

The application process will require you to state how much you want to borrow.

If you are approved for the loan, you’ll be informed of the loan amount, interest rates, and repayment terms. If you agree to them, you’ll sign the loan document and your funds will be deposited into your business account, typically within a few days.

Examples of How to Use Funds from Contractor Loans

Using a contractor loan can greatly increase your business’s productivity. Here are a couple of ways small business owners can use their contractor loan funds:

1. One of the most common ways small businesses use contractor loans is by buying materials and equipment. This could include anything from office supplies, desks, and chairs to building materials and construction equipment.  
2. If you’re a small business owner with a brick-and-mortar business or physical location, you may eventually need to remodel or build new office spaces. The contractor loan can help you finance these projects without the burden of out-of-pocket expenses. 
3. Another way small business owners can use their contractor loans is for unforeseen circumstances, like business accidents or global pandemics. Contractor loans can help you make necessary repairs, pay salary, or get much-needed insurance.
4. Once your business has grown to the point where you need to hire staff or contractors, a contractor loan will allow you to be able to use the funds for expansion. This also includes being able to help your employees get training or licensures and certificates.

Nav’s Verdict: Contractor Loans

Small business owners working in construction or contracting need working capital to stay afloat. While having cash in your bank account is always a good idea, it can also be a good idea to secure financing that helps you extend beyond what your bank account can cover. 

One easy way to find the right contractor loan fast is to use Nav. Our platform lets you instantly compare your business financing opportunities based on your data, so you always know your best options.