How to Get Enough Capital for Starting up a Construction Business

Home » Knowledge » How to Get Enough Capital for Starting up a Construction Business

The construction industry is one of the most resilient niches in the world. Although projects experienced a hiccup at the initial days of the pandemic, public health safety measures, as well as vaccination drives, helped the industry get back on its feet in no time. There’s also no shortage of projects because infrastructure efforts by the government remain ongoing.

Pandemic or no pandemic, now’s a good time to think about starting a construction business. You have the necessary skills and manpower. You’ve got the business idea that you think will make you distinct from your competition. All you need to find now is the necessary capital to fund your startup.

Capital requirements for a construction company can be high, but it’s not an impossible endeavor with solutions like an invoice financing option from lenders. Here are some of the ways through which you can raise enough capital for your fledgling construction contracting company.

Make a Detailed List of What You Need to Start Your Business

Each business is unique, hence, the first step to seeking capital for your fledgling enterprise is to identify your startup requirements. The list should cover everything, so you should spend time going over what you’ll be offering your future clients and what you need to fulfill those obligations.

For a construction business, the heavy equipment and the handheld tools that your workforce will be using are the first things that come to mind. In information technology, these items are called client-side hardware. Aside from the service hardware, you also need to care of the backend or the business side of things. This is where requirements like commercial property, office supplies and furniture, Internet connection, and employee wages come in.

List down each piece of equipment that you will need, and use this list to conduct due diligence to find out the possible costs for acquiring them. This is where you will identify potential partners and suppliers. You’ll also need these approximate figures for the next step.

Get to Know Your Financing Options

As mentioned earlier, there are multiple options for construction business owners to look at in terms of financing.

Debt financing is an ideal method for acquiring working capital, for several reasons. One, it doesn’t force you to relinquish control to funding sources as you would have to with equity financing. Second, financing will stretch out your cash flow by not requiring a lump-sum payment. You will instead repay the loan over many months as agreed with your lender.

Below, you’ll find some of the most common forms of working capital financing. Each form of debt financing is designed to fund specific parts of your startup business and has unique attributes.

Equipment Financing

Equipment financing provides funding for a construction business to buy necessary hardware for cash, without reaching into their own pockets. The lender will take the vendor invoice from the borrower, pay the supplier for the equipment, and notify the company to pick up the equipment. In most cases, no downpayment is needed from the borrower.

Equipment financing is an asset-backed loan, but the company does not have to pledge other assets outside the utilities covered by the funding. The lender has a claim on the new gear until the construction company pays off the loan for the machinery.

Government Contract Financing

This is a comprehensive loan intended to supply businesses that the government has recently awarded contracts to with cash to initiate the project. The funds can be used for a wide range of applications – equipment acquisition, mobilization concerns like real estate and employee salaries, and purchase order financing.

Government contracts are relatively safe and generally stable sources of income. This security means lenders can afford to provide applicants with favorable terms and interest rates.

Small Business Administration Loans

SBA loans are an umbrella term for multiple financing options guaranteed by the government through the Small Business Administration. These loans offer businesses higher borrowing amounts that they can repay over long payment periods that can stretch up to 20 years. The government shares the liability with the lenders in case of default, which means that creditors can afford to put very low interest and fees on the loans.

SBA loans can be used to refinance existing debt, purchase real estate, build working capital and acquire fixed assets. They can also be used for business expansion. You only need to study each loan program offered by the SBA and apply for the one most appropriate for your needs.

Business Credit Cards and Credit Lines

Business credit cards and revolving credit lines provide readily accessible sources of working capital. Business owners can use these credit lines to withdraw cash or make purchases as necessary. The amount is deducted against the total amount of credit available from their account but is restored when full payment is made.

These lines of credit come in handy when businesses experience seasonal fluctuations in revenues. Construction companies can make use of these credit lines to gain cash for operational expenses in between contracts when it makes little to no revenues at all.

Other Ways of Raising Working Raising Capital for construction

An alternative form of financing is equity financing. Instead of approaching financial institutions to borrow money for capital, you are instead asking third-party investors to pitch in money for your capital needs. More often than not, there is no expressed agreement on paying off the investment. However, these investors may seek something else in return like shared ownership or shares of future profits.

There are various forms of equity financing, and these include:

  • Angel investors
  • Venture capitalists
  • Crowdfunding platforms
  • Friends, families, and colleagues

Equity financing is a great option for entrepreneurs who are conscious about their new business’ early exposure to debt. However, some risks come with equity financing like potential conflict from friends and relatives, diluted ownership of the company at its early stages, and a huge commitment in time and effort making proposals to potential investors.

Write an Effective Business Plan

The last step in the process is to write your business plan. While not a legal document per se, the business plan is otherwise necessary when seeking out financing and investors for the business.

According to the SBA, there are two business plan formats. These are, namely, the traditional and the lean startup plans. There are significant differences between the two, specifically in the sections that they define. For the traditional business plan format, it needs to include the following sections:

  • Executive summary
  • Business or company description
  • Market study
  • The organizational structure of the company
  • Product or service selling point
  • Marketing and sales strategies
  • Financial component including funding information and forecasts

On the other hand, the lean startup format has the following information:

  • Key partnerships
  • Key activities
  • Key resources
  • Value proposition
  • Customer relationships and segments
  • Channels
  • Cost structure
  • Revenue streams

In summary, the business plan constitutes your sales pitch to these third parties. The document needs to be very convincing but also very detailed for potential lenders and investors to understand what the business wants to do.

Obtaining capital for your startup construction company may not be a walk in the park, but it is no Herculean task either. You’d just need to take four crucial steps. First, you’ll have to identify what your requirements are and how much they’d cost as a whole. After that, you’ll need to identify potential sources of funds. Last but not least, you should write your business plan and make your proposals to potential lenders and investors.