What Are Your Options for Financing Your Construction Business?
At Cotney Attorneys & Consultants, we understand the sheer amount of costs involved in starting and successfully running a construction business. From payroll and equipment to simply renting out office space, there’s no shortage of costs you have to cover before breaking ground on your next project. Without the appropriate cash reserves, even a single missed payment could threaten the viability of your contracting business.
While self-financing may seem like an attractive option, it’s often not a feasible method of sourcing funding. Especially in the midst of a global pandemic, it’s time to consider alternative ways you can achieve funding for your business. If you are in immediate need of an experienced legal professional to assist you with contract review, payment disputes, or other financial concerns, consult one of our Fort Lauderdale contractor attorneys with Cotney Attorneys & Consultants.
Access to proper equipment is an absolute necessity for any contractor looking to complete projects with the maximum level of quality, efficiency, and safety. Unfortunately, purchasing the appropriate equipment for the job can place serious strain on the very financial resources you were attempting to preserve. That’s why if you need to obtain equipment, particularly heavy-duty equipment like bulldozers or cranes, and are interested in avoiding placing unnecessary strain on your cash flow, you may be interested in equipment financing.
Equipment financing is a type of loan or lease specifically used to purchase physical assets for your company. Simply locate a vendor, apply for equipment financing, and make payments for the equipment over time until the price of the equipment is paid in full. It’s great for contractors like you because you’ll have access to the equipment, tax-deductible payments, and a loan with low-interest rate. It’s great for the lender because the equipment can be used as collateral in case you default on your loan.
Bank and SBA Loans
One of the most popular methods for financing a construction business is taking a loan. For the purposes of this article, we’ll be discussing bank loans and loans guaranteed by the U.S. Small Business Administration (SBA). In the process of obtaining a construction loan, you apply for the loan, provide a downpayment of typically 20 to 25 percent, and receive funding in installments until you pay off the loan at completion of the project or refinance into a mortgage. For SBA loans, you apply via an affiliated lender of SBA, receive the necessary funding, and pay it off within a loan term of five to ten years.
Either type of loan is a valuable option for contractors looking to benefit from relatively low-interest rates and flexible terms; however, there are disadvantages. For example, the process of getting approved for a bank loan can be fairly difficult, especially for companies without an extensive credit history or steady cash flow. On the SBA loan side of things, your business may not qualify as a “small business,” or you may not initially get approved for the amount you requested. These are all factors to take into consideration before taking out a loan.
Business Line of Credit
The last option we’ll be discussing for the financing of your construction business is a business line of credit. A line of credit is a predetermined amount of money that a financial institution has agreed to lend to you that you can access as needed so long as you do not exceed the credit limit. The process for a contractor involves applying at their chosen bank or lender, gaining access to the predetermined supply of money, and then paying interest on any money that you spend. This is a great option for contractors because it provides a steady source of funding for your construction business as well as a source of contingency funding should any hiccups occur.
The disadvantages are similar to that of a regular loan in that you must have a good credit rating along with the necessary business and financial documents to qualify for the line of credit. Additionally, certain lenders may opt to charge hidden fees rather than charging you a high-interest rate. A business line of credit may also not be sufficient in funding the entirety of your construction project, so be cautious and invest in the comprehensive legal services of one of our Fort Lauderdale construction attorneys.
The Bottom Line
What we’ve discussed thus far in this article only scratches the surface of the options available to contractors for the financing of their construction business. From invoice factoring to equity offering, there’s no shortage of methods for contractors to better manage their cash flow. The bottom line is that you must examine the advantages and disadvantages of each of these options and select the one that best meets the needs of your construction business.
It’s also important to remember that the construction industry is rife with payment delays. You’ll never be able to completely account for the fact that an owner may not provide payment in a timely manner. Whether you wish to ensure prompt payment by establishing a contract with provisions that seek your best interest or by filing a mechanic’s lien, a Fort Lauderdale construction dispute attorney is here to guide you through the process.
If you would like to speak with a Fort Lauderdale construction defect attorney, please contact us today.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.