Commercial construction loans: All you need to know as a small business

August 2022

The best building you can do is to build your business, and you will need to access capital to do so. If you own a small business, you probably have heard the phrase, "It takes money to make money." You only need to know where to seek and what to look for. 

But we know that managing cash flow during unforeseen ups and downs may seem challenging, so knowing you'll have the funding you require as you write a construction company plan is critical. Construction business loans and financing for contractors and construction companies can help. In this article, we will discuss commercial construction loans and other funding options to help your business thrive! 

What are construction business loans?

Business construction loans can be considered business loans that cover the overhead expenses required to fulfill a construction project. These expenses may include materials, on-site facility expenses, temporary machine parts, and crew wages. Moreover, other construction business financing uses could be expanding or renovating office space, installing upgrades such as solar power systems, and other expenses related to the purchase, construction, improvement, or modernization.

How construction business loans can help your business

Construction business financing can assist construction business owners in taking advantage of new opportunities and covering day-to-day expenses such as the following:

  • Professional charges (architecture, appraisal, inspection, project review).

  • Lease or purchase equipment, machinery, or vehicles.

  • Purchase tools and supplies.

  • Repair or replace machinery, vehicles, tools, or supplies.

  • Finance large jobs.

  • Fees for subcontractors.

  • Offer new services.

  • Invest in technology to gain a competitive edge.

  • Market your construction business.

  • Manage cash flow and overcome other issues

Now that we've covered a few use cases let's get into the specifics of construction business loans and other financing options. There are numerous options, from bank loans to short-term business financing to invoice financing.

Where to get a commercial construction loan or financing?

You can obtain a commercial construction business loan from a bank, credit union, or private funder. Some SBA loans made available through financial institutions can also be used for construction.

Funders for commercial buildings typically won't fund an entire project. The loan-to-cost ratio or loan-to-value ratio, which determines what they would finance, typically runs from about 70% to about 90%. You'll have to pay the remaining expenses for the project, usually with a down payment.

The price of construction business loans may increase due to guarantee fees, processing costs, and project review costs. Some funders have the option to include these fees in the loan so you can repay them over time rather than having to pay them up once. For this reason, looking at alternative construction business financing might be helpful.

Four alternatives to construction business loans

Alternative funding options are often accessible. For approval, business owners' credit scores don't need to be excellent, and the prequalification process is usually more straightforward. If a construction business loan is not suitable for you, consider the following alternatives:

1. Equipment loans

You may be able to get up to 100% of the value of your business equipment, such as vehicles or machinery. The equipment/machinery serves as the collateral for the funding, making this an option that may meet the needs of business owners with substantial equipment assets but will lower credit ratings. You can use an equipment loan from office furniture and medical equipment to farm machinery and commercial ovens. Some companies specialize solely in this type of small-business loan. However, funders such as the SBA and banks can also provide you with an equipment loan. 

2. SBA Loans

SBA 504 loans, also known as CDC/504, are typically structured as term loans, meaning a loan from a bank for a specific amount with a specified repayment schedule. SBA 504 loans are one of the three main loan programs offered by the U.S Small Business Administration, along with 7(a) loans and microloans.

SBA 504 loans provide long-term (up to 25-year) financing for significant business purchases such as real estate or machinery. You can use an SBA 7(a) loan for construction projects. Some funders may offer 7(a) loans that function similarly to construction loans during your build.

If you qualify and can wait for funding, the U.S. Small Business Administration program is a good option for small-business owners looking to make large purchases. But if you need faster funding, consider that the requirements for SBA 504 loans are rigorous, and the application process is lengthy. Closing can take many months.

 3. Invoice factoring

Construction businesses frequently have to wait 30 to 90 days for customers to pay their invoices. Those unpaid invoices can seriously impact cash flow during periods of poor activity. A loan for invoice financing or invoice factoring offers quick access to money. On a percentage of the money you owe, you receive an advance. The funder then pays the full invoice amount plus fees and interest. Invoice factoring is an excellent choice if you have dependable clients who pay invoices a little bit slower.

4. Merchant Cash Advances or Revenue-Based Financing 

Many construction business owners seek alternative funding options and come across the merchant cash advance (revenue-based financing) option. Merchant cash advances are ideal for construction businesses that require capital quickly to cover cash flow issues or short-term expenses. A merchant cash advance can be a simple way for your business to access funds quickly to fulfill the needs of your construction contract. MCAs are a handy form of alternative business funding due to the speed of funding, especially once you have already built a relationship with your funder.

Apply for construction financing with One Park Financial 

This sort of alternative funding is entirely possible with One Park Financial! One easy way to get started is to see if your business prequalifies by filling out our online form. Filling out our online form gives you access to a funding expert who can discuss your business needs and options to determine what funding types best meet your needs.  If you have been in business for three months and generate at least $7,500 in monthly revenue, you can get started today and get the funds you need for construction!

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.