About Construction Loans
Why construction loans are necessary
In the past, getting access to some up-front mobilization money, from the property owner or a construction loan, was a cinch. Property owners dished out generous sums of money (typically up to 10% of the contract amount) before work even started. Contractors and their subcontractors could start paying for materials in advance. For those that needed to borrow, banks were generous with traditional low-interest loans.
Then the recession hit. And for construction subcontractors, it hit like a ton of bricks.
Subcontractors finance the bulk of every new construction project. They do all the work, buy most — if not all — the materials needed on their own credit, pay for all the labor, and then wait for 30-60 days to get paid.
So, when traditional financing sources dried up, subcontractors had to look for new sources of funding.
Alternative construction financing options
Naturally, alternative lenders sprang up to help fill the void left open by traditional lenders, but the options were few and not ideally suited for construction companies, especially to a subcontractor’s needs. Factoring companies purchase a subcontractor’s invoice once it is approved by the general contractor, but those subcontractors still need to bankroll that first portion of the work — including materials, labor, permitting, insurance and bonding — all on their own. Just that can cost more than 10% of a total project cost. They need funding FAST.
Merchant cash advances (MCAs), also known as daily debit loans, provide cash within a few days and deposited right into a business’s account, which may seem ideal for cash-starved subcontractors, but once the lender starts pulling hundreds or thousands of dollars every day from the contractor’s business checking account, this blessing becomes a curse. Contractors have to scramble to estimate how much capital they actually have, and how much they’ll have tomorrow. This is when the MCA company offers another advance, and the cycle begins again, digging the subcontractor deeper and deeper into a nearly inescapable debt trap.
For a company that is just making the leap from residential to commercial, or that moves from smaller commercial jobs to a big government contract, acquiring the capital needed for the first 30 to 60 days of a job can be a real challenge filled with unknown risks. Combine this with lingering debt or damaged credit scores from the recession, and business owners can face an almost impassable roadblock.
A lending program built for the construction industry
We recognized that these options were not meeting the needs of the small business owners working to literally rebuild our country. Our Mobilization Funding lending platform gives commercial contractors and subcontractors an opportunity to secure the capital they need before the job even begins. This revolutionary type of funding allows contractors to get and spend the money they need in order to do the job they were hired to do.
The collateral for the loan is the job contract itself. The repayment schedule is aligned with the payment timeline established with the owner or general contractor. The loan is specific to each project, gives the owner the ability to use the cash when the job actually starts, and prevents the business owner from having to give up any ownership of his or her company. Common adjustments like change orders and delays will not change the interest rate or nature of the loan.
Stop worrying about how to make payroll, order materials, rent equipment, secure permits, and pay vendors.