Find out all about the different construction loan options that can be used to meet your business needs.
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The construction industry generally comprises of three sectors: buildings (residential and non-residential), infrastructure (such as large-scale public works) and industrial (manufacturing plants and facilities). Within each sector are businesses offering services such as project management, subcontracting and construction site cleaning.
A construction loan can cover a wide range of expenses related to running your venture. These include:
High-cost construction equipment - like concrete pumps, welders and construction vehicles - typically require external financing. Options such as equipment loans or leases can help ensure that you’ll have the facilities and tools you require, without putting a strain on your working capital.
Overcome seasonal fluctuations
Regulations, economic downturns and other issues that may arise unexpectedly can bring about construction hiccups and slowdowns. To tide over the lull periods, you may want to consider financing options like an unsecured loan or line of credit.
Cover workforce expenses
External financing can help cover the costs of your manpower needs, such as staff expansion, carrying out worksite safety training programs or implementing training schemes and upskilling programs.
Fund expansion activities
Insufficient funds for bid securities, a high level of competition among contractors and limited access to credit are common problems that small and medium-sized contractors face when bidding for larger projects. Tapping into a reliable and flexible source of capital can give you a leg up when facing up against competing firms to secure more lucrative projects.
Invest in new technologies
The increasing complexity of construction projects, restrictions on foreign manpower and the rising demand for eco-friendly construction methods have led to a growing need for construction companies to steer away from conventional practices towards adopting new technologies.
While technologies like building information modelling (BIM) and design for manufacturing and assembly (DfMA) can help boost productivity, they typically require significant upfront investments, and generate higher costs in the initial years of adoption. Without external financing, implementing these technologies can prove challenging for small and medium-sized contractors.
Secured loans require that borrowers pledge assets as a collateral for the loan. Should the borrower default on the loan, the lender may sell off the assets to recover the amount owed. A line of credit and equipment financing are examples of secured loans obtained by construction companies.
Unlike secured loan, unsecured loans are not backed up by collateral. Rather, it is issued based on factors like your business credit score or strength of cash flow. While the eligibility requirements of these types of loans are stricter, it can be a suitable option for small construction businesses seeking a flexible financing solution. For example, a line of credit may be used to cover cash flow gaps during lull periods or payroll expenses.
Line of credit
A line of credit, also commonly known as revolving credit provides borrowers with access to a pre-approved sum of capital. You can draw from this sum as and when you need, and interest is charged only on the amount that is drawn.
This is a flexible financing option that lends itself well to variety of construction business needs, such as funding operating expenses, unexpected costs that arise from onboarding a new client or cash flow gaps during the slow season.
An equipment lease isn’t a loan; rather, it’s a long-term arrangement to rent equipment. Instead of making an equipment purchase, you’ll be making out monthly payments to your lender for the duration of the lease. At the end of the lease, you’ll have the option of returning the equipment, or purchasing it at a fair market value.
This financing option is a good fit for businesses that require equipment for large-scale construction projects, but don’t want to bear the costs of maintaining or replacing tools that they might be obsolete in the future.
Now that you have an overview of the common uses of construction loans, let’s explore tips and tactics you can use to maximise your chances of securing financing for your venture:
Steady, consistent growth is key
Rapid growth isn’t always better; along with it comes challenges like cash flow crunches and operational hiccups, which can put your venture at risk. Rather, you’ll need to demonstrate that you have steady revenue stream and cash flow, and are able to pay off your building loan consistently over the long run.
Focus on the details
To win over the trust of your lender, you’ll need to demonstrate that you have a clear plan for your funds.
It helps to zoom in on the specifics, and provide details wherever possible. Getting an equipment lease? You’ll need to collate information about the tools you want to purchase, and be prepared to explain how these equipment are necessary for your company’s growth.
And if you’re seeking a loan to bid for construction projects, make sure you have the building plans, construction contract, income projections and cost estimates ready. Depending on your lender’s requirements, you may want to draw up a plan for communication, to show how you’ll keep them updated on the performance of your projects or business.
Map out a repayment strategy
Your lender needs to assess your ability to pay off your loan comfortably, and by planning out a replacement strategy, you’ll demonstrate that you have the capacity to make consistent and timely payments. Your plan should include your revenue forecast, as well as cash flow projections for up to the next three years of your operation. It’s also helpful to include construction projects that you’ve secured, to demonstrate that you have a ongoing flow of high-margin work.
Running a construction business requires high ongoing costs, and you’ll likely require external financing from time to time. Banks typically require stringent assessment processes and drawn-out onboarding periods, which makes securing a loan particularly frustrating for small businesses seeking to capture fleeting business opportunities.
With online lending platforms like Aspire, loan application processes are convenient, streamlined and speedy - submitting an application takes a matter of minutes, and you’ll be notified of your loan approval status in just 24 hours.