Relying on credit to cover lean times during projects or payment delays shouldn't be a habit. However, for many construction companies, it's a necessary reality in a challenging economy.
Although it's hardly easy to obtain financing, the market has expanded to include many options. Therefore, if you look carefully enough at suitable providers and their financing offers, odds are you'll find something to your liking. Let's take a look at some of the more common options available to contractors.
Taking out a loan
The most logical place to look for cash is your current bank. Assuming you have a good relationship with your bank and your business is in good standing, you should be able to obtain a conventional bank loan. There could be some roadblocks, however, if you:
- Can't show sufficient cash flow to assure repayment,
- Have a poor credit history, or
- Don't have sufficient collateral to cover the debt.
If finding the right bank loan proves elusive, you could engage a broker for help. Brokers don't lend money — they're experts at finding those who do. For a fee, a broker will generally perform a thorough review of your finances, discuss any problems involved in qualifying for a loan, including credit concerns, and then go out and find you the cash. Because brokers deal with multiple lenders, they can shop for you, identify suitable lenders and negotiate the terms.
Tapping the government
Of course, banks are not the only game in town. The U.S. Small Business Administration (SBA) offers a multitude of programs that bolster the ability of lenders to provide both long and short-term financing to small businesses that may not otherwise qualify for traditional loans.
SBA loans offer the flexibility of longer repayment periods and looser affordability requirements than normal commercial business loans. The SBA's guarantee assures the lender that, if you don't repay the loan, the federal government will reimburse the bank, up to a certain percentage, which varies based on the loan amount. Even though the SBA backs the loan, however, you are still obligated for the full amount due.
To be eligible for SBA loan assistance, a construction company must have annual sales or receipts of not more than $6.5 million to $31 million, depending on the specific business type. According to SBA.gov, special trade contractors max out at $14 million in annual sales or receipts, while heavy construction contractors max out at $33.5 million.
The SBA's primary program is the 7(a) loan, which provides a maximum of $5 million, with a guarantee of as much as 85% on loans of up to $150,000 and 75% on loans of more than $150,000. (The maximum guaranteed loan amount is $3.75 million.) Interest rates and other terms are negotiated between the borrower and an SBA-approved lender.
Drawing a line
If you don't want to take on the financial burden of a loan, consider getting a line of credit at your local bank to make up the difference between current spending needs and cash on hand. You can access a line of credit as you need the money and repay it as cash allows. You pay interest only on the outstanding amount.
For example, that means you could take $3,000 of a $10,000 credit line to meet a 30-day need, pay interest on it for that amount of time, pay it back, and then borrow again. By contrast, with a $10,000 loan, you would generally pay interest on the entire amount, whether you used all the money or not.
Keeping things in order
No matter where you go for financing, you'll need orderly, comprehensive financials. Without trustworthy documentation of your construction company's financial position, income, expenses, and cash flows, any conversation regarding an infusion of cash will likely be a short one. Keep your financial house in order and you'll stand a better chance of getting credit when you need it.
Established in 1949, HBK CPAs & Consultants (HBK) offers the collective intelligence of hundreds of professionals in a wide range of tax, accounting, audit, business advisory, valuation, financial planning, wealth management and support services from offices in Pennsylvania, Ohio, New Jersey, and Florida. HBK professionals deliver industry-specific expertise in manufacturing; healthcare (including long-term care); real estate and construction; automotive dealerships and not-for-profit organizations. HBK combines the technical resources and expertise of a large national accounting and professional consulting firm with the personalized attention of a local company.