There are different types of construction business loans for construction companies. However, in order to determine the best type of loan for your company, you need to know what your business needs.
If you’re looking to apply for construction business loans, here are three types of loans you should consider.
1. Invoice Financing Invoice financing
Also called accounts receivable financing, it is a perfect option for construction companies with pending invoices. This form of funding frees up working capital tied in those invoices by selling them to a third party called factoring companies.
You need to pay interest (2% to 5% depending on the lender) on the total amount of invoices. It is a self-collateralized loan, which means that your invoices secure the funding and you can receive funding quicker. Your lenders will assess the creditworthiness of your customers in order to qualify.
Once approved, you can receive the funds within 48 hours. There are a few disadvantages. If calculated annually, the interest rates for invoice financing can be expensive; it can go up to 24%. While a high credit rating is not required, factoring companies greatly consider your customers’ credit history.
2. Equipment Financing Equipment financing
This is perfect for construction companies looking to purchase equipment and machinery, such as backhoes, concreting, and more. Once qualified, lenders will give you a lump sum of money which you can repay within the assigned repayment terms.
You generally need to pay an initial deposit over the agreed period of time and then make a balloon payment before the term ends. Furthermore, you don’t have to pledge any personal or business assets since the equipment purchased serves as collateral. The lenders have the right to repossess the equipment in case you default on the loan. Once you make the final payment, the equipment will be yours.
3. Business Line of Credit
A business line of credit is funding option where lenders give you a predetermined credit limit which you can withdraw funds from as needed. You only have to repay the amount you borrowed, plus interest – not the entire credit limit.
Since you can withdraw from it as needed, a business line of credit is ideal for bridging cash flow gaps and seasonal fluctuations. Once approved, you’ll immediately receive funding within one to two business days. Many business owners prefer the flexibility of a business line of credit.
However, it’s important to ask your lenders about fees because usually, there is an establishment fee as well as an ongoing monthly fee to keep your line of credit active.
The Best Construction Business Loans for Every Company If you’re not sure as to which loan is the best for your company, financial experts can help you out which offers different types of loan programs suitable for every business need.