Need a Loan for Your Construction Business? These Are Your Options

Whether you’re starting a construction business or you need help with cash flow, getting a loan can make all the difference. Below we explain different types of loans from financial institutions, and share the pros and cons for each. If you go the friends-and-family route instead, make sure to get all the loan terms in writing.

1. Short-Term Loans 

A short-term loan can be one of the fastest ways to get funding for your construction business — sometimes in only one or two days! — and you won’t need to put up any collateral. Make sure you fully understand the terms and can repay the loan, with interest, in the specified time frame.  

Pros: 

• Easy application process; the applications are typically shorter than for other types of loans.
• Faster funding.
• Easier to qualify for. Even if your business has limited credit, you might still qualify. 

Cons:

• Higher interest rates, because short-term loans are a higher risk for lenders. 
• More frequent payments, often biweekly or even weekly. Make sure you have the cash flow to cover the payments so you don’t default on the loan.

2. Equipment Loans 

Purchasing machinery and other equipment outright, or repairing it, can be expensive and put a strain on cash flow, especially if your business is new. Equipment loans to the rescue!

Be aware that the funds must be used only for equipment and not other business expenses. Also, some lenders might have strict requirements, such as high personal and business credit scores, and interest rates might be higher than for other types of loans. 

Pro: 

• No additional collateral needed. The equipment you’re going to purchase or repair serves as collateral, so you won’t have to risk any other personal assets. 

Cons: 

• The funds can be used only for equipment purchases or repairs. 
• Due to interest on the loan, it will end up costing you more than if you hadn’t taken the loan. 

3. Business Line of Credit 

A business line of credit gives you access to a certain amount of money to help cover business expenses; you take out funds as needed and repay them over time. This type of credit is revolving, which means you can keep using and repaying the funds as long as you don’t exceed your credit limit. You’ll also pay interest only on the funds you use. 

This type of loan is great for helping manage cash flow; you can use it to cover unexpected expenses, inventory and even payroll. 

Pros: 

• Can improve cash flow immediately. 
• Builds credit for your business, just like a typical credit card, when you use the funds and pay them back on time.

Cons:

• Difficult to qualify for. You’ll need to present your business’ financial statements, and you might even need to show two years of business history. 
• Since this isn’t a traditional loan, the borrowing limits are typically low and might not cover all of your expenses. 

Tip: Present your business to lenders in the most professional light by using Houzz Pro. It lets you create a free business website and add video highlights to your Houzz profile page, for starters. It can also help you get more client reviews to show lenders that your business is in demand.

4. Invoice Financing 

Invoice financing is a short-term loan based on invoices awaiting payment. The funds usually arrive quickly, and you might not need to put up any collateral or fill out a lot of paperwork. Lenders might also collect the invoice payments directly from the customers, which would reduce your administrative duties. One-time or monthly fees might be required; make sure you understand and account for them. 

Pro: 

•  You’ll get a large amount of the money customers owe you right away. 

Con: 

• Can be costly, due to the fees. 

As you weigh the pros and cons of each type of loan, it can be helpful to make a list of your business’ needs. And consider chatting with other building pros, in person or online, to find out what types of loans they’ve used and recommend.

Tip: If you’re a Houzz Pro subscriber, you have access to financial tools that make getting paid and managing cash flow even easier. For instance, it can help you collect deposits and upfront retainers when appropriate to get jobs moving quickly. With payment scheduling integrated into estimates, you can set client expectations not just for the overall project cost but also for when payments are due. And QuickBooks integration helps you keep on top of accounting for everything in a most organized way.