Our Guide to Getting Approved for Contractor Business Loans
Here’s what you need to know if you’re interested in a business loan for your contracting business.
The Types of Contractor Business Loans
If you conduct research, you’ll find that there are a wide array of loans for contractors. It’s a good idea to compare all your working capital options and choose the best fit for your unique situation.
Consider factors like how much money you need to borrow, what you need the funds for, and your preferred repayment period. Don’t forget to consider your credit score and unique business goals as well. The most common types of contractor business loans you may come across include:
- Equipment Financing: If you need to pay for new equipment or update old equipment to perform your work, equipment financing makes the most sense. Once you receive a quote for the equipment you’d like to purchase, the lender may finance you all or part of the cost. The equipment will serve as collateral so if you default on your loan, the lender will seize it.
- Business Credit Card: A business credit card can be the ultimate financing option if you’d like to pay for everyday expenses like office supplies and materials. As long as you make timely payments in full, you’ll build your credit and enjoy perks like cash back and travel points.
- Business Line of Credit: As a contractor, you may be unsure of exactly how much money you need to borrow. That’s where a business line of credit comes in; it offers larger loan amounts than a credit card and allows you to withdraw as much or as little as you need. Therefore, you’ll only pay interest on the amount you borrow.
- Term Loan: A term loan may be the way to go if you have a specific expense in mind and know how much it will cost you. With a term loan, you’ll receive a large sum of money upfront and repay it over time via monthly payments.
- SBA Loans: If you need a loan to cover a wide array of expenses, an SBA 7(a) loan is ideal. Not only does it offer a low interest rate and long repayment term, an SBA 7(a) is guaranteed by the SBA. This means, the SBA will take care of a significant part of your loan if you default.
6 Tips for Taking Out a Contractor Business Loan
Before you pursue a business loan for your contracting business, be sure to follow these tips.
1. Check Your Credit Score
It’s a good idea to check your credit so that you know what types of contractor business loans are within reach.
If you have bad credit, you may want to improve it before you go through the business financing application process. This will increase your chances of securing a lower interest rate and more favorable terms. Pay your bills on time, keep your debt-to-income ratio low, and dispute any errors or inaccuracies on your reports.
2. Gather Documentation
Most lenders will ask that you provide a variety of documents related to your construction company. Collect three to four months of your most recent bank statements, profit and loss statement, balance sheet, and a few years of your business tax returns. You may have to work with a CPA or tax professional to access them.
3. Don’t Overborrow
Loans for contractors usually come with large loan amounts. While this is great, it can steer you into a cycle of debt. Just because you have access to thousands upon thousands of dollars in funding as a contractor, doesn’t mean you should borrow more than you need and can comfortably afford to repay.
4. Read the Fine Print
You don’t want to take out a loan only to later find out that you’re stuck with a high interest rate or exorbitant fees. Before you sign on the dotted line, read your construction loan agreement thoroughly so you know exactly what to expect. If you’re unclear about something, reach out to the lender for clarity.
5. Consider Seasonality
If you perform seasonal work, be aware of how your documents will look in a lender’s eyes. Present off-season bank statements and revenue information with an explanation that you’re slower in the summer, for example. If possible, apply for a contractor business loan at the end of your peak season so a lender knows you have the funds to pay them back.
6. Avoid Loan Stacking
Loan stacking occurs when recipients take out multiple small business loans at one time. While it may be tempting to loan stack when you’re pressed for cash, doing so can lead to financial trouble. Also, many lenders won’t approve you for a loan if they know you’ve already committed to financing with another elsewhere.
Conclusion: Use Contractor Business Loans to Thrive as a Contractor
Unlike an employee with a 9 to 5 job, general contractors and other construction business owners are responsible for covering their own expenses.
Unless your business generates consistent cash flow, you’ll need contractor business loans to support your financial needs. As long as you don’t overborrow and repay your loans, they may steer you toward unparalleled success.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.