Small Business Construction Loans: How to Secure One

Within the construction industry, there are several myths I would like to bust! One of them is to change the negative perception around taking out a loan or needing funding!  As businesses start out or begin to grow and scale, obtaining additional financing or securing small business construction loans to support cash flow to take on new projects and get mobilized with labor and materials should be seen as a strategic and smart move, as long as it is executed correctly!

Having a solid financial partner can strengthen your business and set you up for success far into the future.   Whether you have been in business for years or just starting out, focusing on the financial aspect of your business should be one of your highest priorities.  One of the first steps in securing a loan for your small construction business is setting up a relationship with a bank.  This is not just opening a bank account – which, yes, is part of it!  But the first part is opening a bank account at a bank where you can speak to a live human who understands your business, your industry, and your goals.  That is the foundation of being able to gain access to capital and a future lending program.

To obtain a strong lending or banking partnership, it will be imperative to get your financial documents in a clean and manageable order.  You can do this in a number of ways, but I highly recommend finding a good accountant and solid tools and resources to manage your cash flow. 

According to the SBA (Small Business Administration), only 13% of loan requests were approved at big banks in 2021.  That leaves the alternative and private lenders to fill the gap.  “No one should be everything to everyone.”  Banks and lenders all have their own specialties and consumers they can best support.  That is why in the construction world, we have to think “outside the box” and really focus on the relationships we cultivate with one another.   We need to find unique lenders to partner with us for financial support and ones that understand construction, our challenges, and what it takes to be successful in the industry.  By the way – this means the same for me at MF.  If the average bank doesn’t like the construction industry, they definitely don’t like a private lender to set out making small business construction loans to contractors in the industry.  My advice here comes from first-hand knowledge and personal experience.

What does it mean to be bankable?  A “bankable business” is one that has a strong focus on some of these key areas:

1. A solid financial track record highlighting your ability to be profitable 
2. Stable and predictable cash flow that is efficiently managed and supported through clean financial documents.  Your cash flow reports should allow the business leaders to predict, estimate, track, and execute a variety of financial decisions in order to continue to grow and protect your business.  Your financial documents include tax returns, income statements, and balance sheets. 
3. You should care about your credit reputation, as it demonstrates your integrity and discipline in repaying loans and paying bills on time, which ultimately lowers your financial risk and can reduce your cost of borrowing money. 
4. Lastly, you want a relationship oriented, dependable and knowledgeable leadership team who will make responsible decisions, display honesty and trust, and continuously build strong relationships to grow the integrity of the company with a variety of business partners. 

When opening a bank account, you will need the following, so be sure to keep these documents in a safe and easy-to-locate place:

• Articles of incorporation
• Proper forms of ID like driver’s license for any owner of 25% or more of the business (and spouses) 
• Operating agreement (shareholder, K1 schedule)
• Evidence the business is in good standing with the state in which they are formed (this can be done through your state entity search)
• Business Profile-  Which is an application highlighting what your business does, what it sells, where you are located, who you sell to etc. 

This may sound like a lot, but it is in fact easy to do as long as you spend the time to organize it and manage it!  Securing small business construction loans when needed for a construction business can be beneficial in multiple ways, as it provides the capital necessary for growth, stability, and operational efficiency.  

First and foremost, it can help with your cash flow management. Construction businesses often face fluctuations in cash flow due to project-based revenue cycles, seasonal slowdowns, or delays in client payments. A loan can cover operational costs—like payroll, materials, and equipment—during these periods, ensuring the business can meet its commitments without interruptions. This stability helps maintain credibility with clients, suppliers, and employees

It can also allow you to build your business and invest in equipment and technology to best serve your business and client’s needs.  Construction requires substantial investments in specialized equipment, vehicles, and technology, all of which may be necessary to stay competitive. Loans allow businesses to invest in updated machinery or adopt new technologies, such as drones or construction management software, without depleting cash reserves. These investments can improve efficiency and reduce long-term costs.

Lastly, securing small business construction loans can help you scale and expand. Securing a loan can empower a construction business to take on larger projects, enter new markets, or add to its workforce. Having access to capital can be pivotal when bidding on significant contracts or taking on projects that require upfront expenses, positioning the business for future growth and new revenue streams

Ultimately, a well-structured loan can enable a construction business to grow steadily, navigate industry-specific challenges, and stay competitive, all of which contribute to its long-term success.  The largest takeaway from this should be number one,  it is ok to take out a loan, and number two, ensure you keep good records and organization of your financial records!