All You Need to Know About Securing a Loan or Line of Credit

Many business owners are intimidated by the thought of discussing financing with a bank. Dan Wies is just the opposite: he interviews the banker to see if they understand his business. 

“There are a lot of banks out there that say they ‘do’ construction,” said Wies, vice president of a 48-year-old, family-owned commercial drywall contracting firm that serves clients in Missouri and Illinois. “Yet, in the course of my years in the business, I’ve found that very few of them really understand the construction industry.” 

For Alisa Bennett, vice president of Bennett Contracting Inc., an excavation and underground utility construction firm based in Bradenton, Florida, getting financing hasn’t been a challenge—interest rates are the challenge. She and her husband founded the firm in 2000 to handle site-development packages for commercial projects, such as schools, parks, condominium complexes and retail establishments. Securing low-rate financing has become more challenging in recent years. “We were spoiled by so many years of low rates,” said Bennett. 

Just as choosing the right employees can make or break your business, choosing the right financing can make a significant difference in the success of your business. If you’re considering financing for your construction business, the following are four options to consider.

1. Bank Loans/Lines of Credit

For most small businesses, loans or lines of credit are the most popular choices, and many owners turn to their bank or credit union first. The 2019 Small Business Credit Survey (SBCS) compiled by Federal Reserve Banks revealed that 85% of business owners surveyed applied for this type of financing. And of those who were successful in securing a loan, most were satisfied with the cost of financing they received. In fact, 67% were satisfied with the financing they received from a large bank, and 79% were satisfied with financing from a small bank.  

Term loans offer a fixed amount of funding for a fixed period of time, and sometimes at a fixed interest rate. A line of credit offers a credit limit against which the firm can borrow as needed and pay off to replenish the line. Term loans are popular when firms need a specific amount of financing to meet a specific need. A line of credit is more flexible, and interest is only charged on the amount used, so it’s often used to solve cash flow issues or as a backup plan for unexpected expenses. 

The biggest drawback with bank financing is the time involved to find the right financial institution and complete the paperwork required. In the SCBS survey, a long wait and difficult decision process were cited by business owners as the top challenges associated with bank funding.

“The most recent bank we did a deal with took a little time,” said Wies. “They went through our financials and got an appraisal on a property. The start to finish of this deal was around 12 months. We vetted them as much as they vetted us.” 

Bank loan underwriting will almost always require a personal credit check of the owner(s) and may also involve a business credit check. Detailed financial information will be required as well. Many banks have pulled back on making smaller loans. For some banks, $150,000 to $200,000 is considered a small loan.

2. SBA Loans

Bennett Contracting recently took out a Small Business Administration (SBA) 504 loan to fund property improvements. “It’s been one of the best experiences I’ve personally had with financing,” said Bennett. She found the application process “long and tedious,” but ultimately worth it. “The end result is that 40% of our mortgage on our business property is a 20-year fixed loan at just 2.99%,” she says. “Where else could you get that kind of deal?”

The program Bennett Contracting took advantage of is just one of several SBA loan programs available. The SBA doesn’t make loans; it guarantees them. Funding comes from financial institutions around the country. For many of the programs, loan amounts go up to $5 million (some are lower), and proceeds can be used for a variety of purposes. There are SBA loans for purchasing commercial property (at least 51% owner-occupied), for working capital and to refinance debt. 

The popular 7(a) loans for $350,000 or less will require the lender to prescreen the application using a Fair Isaac Corporation (FICO) score called the Small Business Scoring Service (FICO SBSS) Liquid Credit score. The owner’s personal credit report data may be analyzed along with business credit data and even financial information. The SBA requires a minimum score of 140 out of a maximum of 300, but many lenders want to see scores of at least 160. 

While the SBA has minimum requirements, the lenders that make these loans may also impose their own requirements. A rejection from one lender may mean you’re not a fit for that lender, but it doesn’t necessarily mean an SBA loan isn’t right for you. Learn as much as possible about why you were turned down and consider talking with other lenders. 

3. Equipment Leasing & Financing

Construction projects require large equipment, and any decision about what equipment to acquire will also involve an analysis of how to pay for it. Equipment financing has been key to Bennett Contracting’s financial success. 

“We primarily use financing for large equipment purchases,” said Bennett. “We regularly purchase excavators, loaders and trucks, and we attempt to shop for the very best financing deal available.” She’s not shy about asking for a better deal, and recently it paid off. “At the end of 2018, we were able to purchase a large, $180,000 excavator for 0% interest and a $70,000 roller for 2.65% interest,” she said.

The fact that the equipment serves as collateral for the loan or lease means lenders may have somewhat more flexible criteria for approval. But no lender or lessor wants to repossess an excavator. So, just as with a loan, make sure you’ve checked your business and personal credit scores and are prepared with financial data to share as requested. 

4. Factoring 

Eight years ago, Kevin Christensen and Jordan Keith joined HK Composites, which manufactures insulated concrete sandwich panels used in construction projects around the world. They were essentially relaunching the company and relied on a patchwork of funding sources, including personal funds, microloans, and loans from friends and family members.

HK Composites has been on a growth trajectory ever since, but even with significant revenues, finding traditional financing has been tough. One bank turned them down for a bank loan but referred them to a subsidiary that provides invoice factoring. It’s been a crucial source of financing for their business ever since. 

“Our customers typically pay within roughly 60 to 70 days, but most of our suppliers require us to pay within 30 days net,” said Christensen. “Factoring allows us to borrow against our invoices. In many cases, as soon as our customer receives the product, the lender will lend us 80% of the total invoiced amount. Essentially, this gives us immediate cash.” 

The cost of this type of financing varies, but effective rates of 20% to 35% or more are not uncommon. HK Composites has up to 90 days to repay the factoring company, and the fees are based on how long it takes to pay it back. “Factoring is expensive money, and we try to avoid it if we can, but without a traditional line of credit, that is very difficult,” said Keith.