Construction projects are capital-intensive and, unlike the way in which many goods and services in the United States are bought or sold, the company undertaking the work delivers on the product before billing and months before receiving payment for its services. Due to the nature of the business model, as well as to the Great Recession of 2009, many commercial contractors have had a hard time securing a bank line of credit or other traditional means of funding.
When seeking a commercial contracting loan, you should consider the following factors in deciding which loan to pursue:
What is the capital for?
Commercial contracting loans are often used to cover any number of a business’s needs, such as the cost of leasing equipment, labor, materials or bond premiums. The more specific, the better.
How much money is needed?
Prior to seeking a loan, examining your current financial position will give your business a better long-term picture of your true lending needs. For larger loans, the input of a Certified Public Accountant can help to ensure that you are seeking the appropriate sized loan for your company.
Once you have pinned down the purpose and amount of capital you are looking for, you can move on to identifying the appropriate loan.
Here are some additional questions to consider while making your decision:
Is your repayment schedule in line with your pay apps?
Be sure to have a full written breakdown and understanding of when your payments are due and what the penalties are for late payments in case of a change order, weather delay or other holdups. Hidden fees and penalties can add up quickly and result in a more expensive loan than you had anticipated.
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Can you build the cost of financing into the bid amount or project costing?
The key here is anticipating which jobs you will need additional capital for rather than waiting until your coffers have started to run dry. Building the cost of financing into your bid amounts will allow you to keep your profit margin at your projected amount.
What is the total cost of the loan? (Including closing costs, interest and additional fees)
No loan is going to be free, but you should have a solid understanding of the cost of that capital before signing on the dotted line.