In construction, cash is king. Whether you’re waiting on client payments, investing in new equipment, or ramping up for a big project, access to capital can be the difference between growth and grinding to a halt. But should your construction company apply for a business loan? It depends. In this blog, we will discuss which questions to ask before you apply, the best sources for business financing, and best practices after you sign the paperwork.
Key Questions to Ask Before Applying for a Loan
Before you fill out a loan application, take a step back and evaluate your needs and readiness. These five questions will help you determine whether a loan makes sense and what kind of financing is best for your situation.
What is the specific purpose of the loan?
Are you covering payroll during a slow season? Buying equipment? Funding upfront costs for a new project? Loans are powerful tools, but only when tied to a clear, necessary purpose that supports your growth or operations.
Do you understand your cash flow and budget?
If you’re not tracking your income and expenses closely, it’s easy to overextend. Review your cash flow forecast to make sure you can realistically cover loan payments. Remember, lenders will ask for this too.
Are there other options?
Could you lease equipment instead of buying? Negotiate better payment terms with clients or vendors? Tap into a line of credit you already have? A loan might still be the right call, but always explore alternatives first.
Will the loan generate a return?
A loan should ideally lead to more revenue or efficiency. For example, if a $50K loan lets you take on a $200K job, that’s a smart investment. But if the funds are just bridging ongoing losses, it might not be sustainable.
What’s your current financial position?
Lenders look at your credit score, debt-to-income ratio, time in business, and annual revenue. Being honest with yourself about where you stand can help you find the right product and prepare for the application process. (Find out how we help you with this!)
Best Loan Options for Construction Companies
If you’ve determined that a loan is the right move, the next step is finding the best type for your needs. Here are the most common loan options tailored for construction businesses.
Equipment Loans: These are ideal if you’re purchasing machinery or vehicles. The equipment serves as collateral, often making approval easier and interest rates more favorable.
Business Lines of Credit: Think of it like a credit card for your business. You borrow what you need, when you need it, and only pay interest on the amount used. Great for covering cash flow gaps.
SBA Loans: Backed by the Small Business Administration (SBA), these loans come with lower interest rates and longer repayment terms. They’re harder to qualify for but worth exploring, especially for established businesses.
Invoice Financing (aka Invoice Factoring): If unpaid invoices are tying up your cash, this lets you borrow against them, giving you fast access to working capital while you wait for client payments.
Best Practices After Getting the Loan
Securing a loan is just the beginning. To get the most out of it and stay financially healthy, follow these best practices.
Use the funds for their intended purpose. Mixing loan money into general operations without a plan can lead to waste and financial strain. Remember, the loan is only beneficial when tied to a clear, necessary purpose that supports operations.
Make sure you keep tracking your cash flow. Loan payments will impact your monthly budget. Keep a close eye on cash flow to ensure you’re staying on track. Provided you created scenarios with this loan in mind, you can course-correct if needed.
Make sure you stay in communication with your lender. If challenges come up, like delays in receiving payments, reach out to them early. They may offer temporary relief or restructuring options.
Store all loan-related agreements, payment records, and communication in one place. You’ll need this info come tax time or if you apply for future financing. Verify with your bookkeeper that both the loan proceeds and any repayments are being recorded accurately.
A business loan can be a powerful tool for construction companies, but it’s not a one-size-fits-all solution. Take the time to ask the right questions, choose the best financing option, and manage the loan wisely once it’s in place. When used strategically, borrowed capital can help your business level up without knocking you off balance.
Having a proactive bookkeeper in your business can help you navigate these types of decisions. Ready to find that strong financial partner? Learn about our services to see if we are the right partner for your business!