For many contractors, securing a commercial construction loan happens when stress levels are already high. The project has started and the crew is on-site or it is only a few days / weeks from starting. Payroll becomes an emergency — how will you pay your team while waiting for the GC to pay you? And how much time, and paperwork, is it going to take to get you the money you need?
There are multiple options for businesses looking for commercial construction financing, including contract financing, factoring, a merchant cash advance/daily debit and SBA loans, but there is no standard set of requirements for what you need in order to apply.
We developed this rough outline of documents and information you may be asked to provide when applying for commercial construction financing. Keep in mind, these may vary depending on the lender, your time in business, credit history and other factors.
Regardless of the type of loan you may want or apply for there is one thing that you should do in order to best help yourself get approved – be ready to tell your story. Your story should include the following:
- What is your business and what do you do? Imagine you are speaking to a third grader and they need to understand and explain your business after they hear it from you. If a lender doesn’t understand what your business does, how it makes money, and what you need the money for they will have a very difficult time approving you for a loan.
- Be ready to walk through how you got to the point you’re at right now and why you are seeking a loan.
- Your plan to repay the loan.
- Be ready to walk through your current financial situation — income statement, balance sheet, tax returns, and bank statements.
- Be honest, direct, and tell the Lender everything they need to know up front so there are no surprises throughout the process.
- Good lenders will run checks and see the problems that exist — it is much better for them to hear about them from you before they find them out on their own.
You may not be the right fit for every lender and that is OK. Give every process you enter the same effort and energy because you never know which one will be right for you.
Applying for commercial construction financing
The first step in securing almost any type of funding is to complete an application with the lending institution. The important thing to know here is that application formats can vary. Some lenders, like us, only require a single-page application that can be filled out in no time. Others, like those that offer government-backed SBA loans, can require many separate forms totaling dozens of pages that take you (and an accountant) weeks to properly prepare.
At a minimum, applications for commercial construction loans typically ask for the following:
- Business name, address, phone number and Federal Tax ID number.
- Details about the business owners (name, contact info, marital status etc.).
- Work history, including amount of time in business, scope of work and references.
- If you have any current legal judgments or liens against the business or the business owners.
For more information about financial planning, bidding strategies and project management for your commercial construction company, download our free e-book.
Commercial construction loan documentation
Once your application is complete, you’ll need to submit the supporting documentation. This step varies greatly depending on the lender and type of financing, but generally ties in with the requirements of the application.
Here’s what we require:
- 4 Most Recent Bank Statements
- Year-End Income Statement & Balance Sheet for Past Two Years
- Year-to-Date Income Statement & Balance Sheet
- Tax Returns for the Last Two Years
- Copy of your Contract
Most will also request professional licenses or government filings of your business, such as:
- Contractor’s or trade license for the state you are working in
- IRS Form stating your business’s Federal EIN Number.
- Articles of Incorporation
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Commercial construction contractors are in an almost impossible situation. The economy is booming, and public and private organizations are looking to build new offices, hotels, skyscrapers and more. But to make all that happen, organizations — and the general contractors they hire — depend on thousands of subcontractors who are willing and able to do the work right.
The construction industry is still considered a high-risk lender, despite all the demand, which means that few commercial contractors are able to qualify for traditional bank loans. And unless the contractor’s credit score is at least 600, most will not qualify for a Small Business Loan (SBA) loan.
Commercial construction companies need outside funding
Without the ability to secure financing, construction companies have to self-fund all of their project expenses out of pocket. Just in the first 30, 60 or 90 days of a job, a commercial construction company needs enough money on hand to cover the project’s expenses, including pricey bond premiums, plus labor and materials costs.
For short-term projects, the company may need to complete all the work before it can bill for the payment. And if the general contractor or project owner does not pay, it could take years for the business to recover.
This reality limits how many people a company can hire, supplies and materials they can order and equipment they can use. Everything is controlled by how much cash they have on hand.
And in an industry notorious for late payments and razor-thin margins, the risk is particularly high. It can take business owners years to build up a war chest that is sufficient to take on larger and more valuable projects. That, in turn, puts a huge strain on the companies who would want to hire them.
The trouble with traditional lending for commercial construction companies
The trouble with many funding options, however, is that the commercial construction industry has its own complex set of rules, regulations and standards. Lien rights, retention and the bonding system are nearly exclusive to construction and are misunderstood by most lenders.
Even though payment terms are set at 30- or 45-days, the average amount of time before payments are issued is actually 57 to 63 days, according to SageWorks. For lenders outside of the industry, those late payments by general contractors and property owners mean frequently dealing with expensive late fees. The resulting hit on the company’s credit score further disqualifies them from future low-interest loans.
Alternative lenders specific to the commercial construction industry have stepped in to solve this problem, allowing companies to take on more risk and grow to meet the increased demand for their services.
Mobilization Funding is one of those alternative lenders. Mobilization Funding began with the interests of a commercial contractor in mind. That means no late fees, and flexible payment terms set around your work schedule, allowing you to better cover the cost of bond premiums, labor and materials up front.
There are many factors behind landing a winning bid. For upper-level commercial construction projects — especially for those lucrative government contracts — you have to prove that your company can complete the work for a competitive price and that you have the means to carry it through start to finish. A Financial Capability Letter can solve this problem.
Funding affects everyone on the job.
If you don’t have the financial ability to make payroll, cover the bond premium, secure needed equipment or pay vendors, your entire project can be put at risk. If one subcontractor on the job cannot afford to cover the necessary costs, they may cut corners, like delaying material orders or putting less labor on the job. Even worse, if a subcontractor fails to pay its vendors or is otherwise unable to complete the job, the general contractor and owner risk a lien being placed on the property.
For many scopes of work, like Structural Steel, HVAC, Electrical, Concrete and Sitework contractors, the cost of material orders, equipment and dump fees early in the project can be incredibly expensive. So for those trades in particular, having sufficient financing in place is critical.
General contractors recognize that this financial strain by a subcontractor can delay or drag out the job, stressing the project overall. However, there are very few subcontractors who are able to have enough cash on hand to do the project without outside funding.
A Financial Capability Letter proves you’re financially prepared to do the work.
Include a Financial Capability Letter in your bid package, showing you have the capital available to do the project right.
The letter, supplied by your funding partner, will state the following:
- The amount of funding available
- That the funding will be set aside specifically for that project
- The name of the project
- The name of the general contractor
Often in the form of a loan pre-approval letter, the Financial Capability Letter will state that your company’s financial standing has been verified. The letter also acts as an additional point of reference, making the general contractor or project manager feel more confident in your ability to complete the work on that particular project. In a competitive bidding process, this can make all the difference.
Pro tip! In the pre-approval process, secure a breakdown of how much the loan will cost, then build the cost of that capital into the bid.
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Few commercial contractors have the luxury of paying the full up-front cost of a project without help along the way. But often, they wait too long to seek that additional funding, which can put unneeded stress on the project itself or even the business overall.
Due in part to the Great Recession a decade ago, most general contractors have done away with the practice of making upfront payments to their subcontractors. As a result, subs will be on the job site for 30 or 60 days before they can submit a pay app for that work, and then it could be another 30 or 60 days before they receive that payment. Throughout that time, they still need to make payroll, cover material costs, equipment and insurance.
Most contractors need additional funding, but where can they get it? Many lenders, from banks to factoring companies, will not issue funds even to well-qualified or established businesses until they have an actual approved pay app or receivable. Unfortunately, by that point those businesses often find their project cash flow already stressed.
You don’t need to wait that long for the capital you need. Late payments to vendors or supply houses (and late payment fees) may not be necessary after all.
When should you start looking for funding?
Consider the cost and method of any needed capital during the bidding process of a job. Often, owners wait until after a job has been awarded and then scramble to find funding when it’s most needed, which can limit their options and force them to take out a more expensive loan. That scramble can be avoided. No matter what type of lender you plan to use, it’s always wise to identify the amount and cost of a loan so that it can be built into your bid price.
The Mobilization Funding difference
Mobilization Funding, LLC goes a full step further. We talk to many of our clients even before they bid on a job and provide a straightforward breakdown of the cost of the loan, catered specifically to the project they are considering so that it can be built into their job costs. The funds are issued upon the start of a project, or at the time they are needed by the borrower. The repayment schedule is then organized according to the project’s payment schedule. In other words, the loan schedule is designed so that the business can repay the loan with the payments they are receiving from the general contractor through the normal schedule and process.
Mobilization Capital, also known as Mobilization Funding, is a type of loan that can help you avoid stretching your resources too thin in those first several months of a project. It’s a unique loan option offered by a small number of lenders. You can learn more by checking out our page, About Construction Loans, or contact us to get started.
Construction projects are capital-intensive and, unlike many other industries, the company undertaking the work — that is, the subcontractor — puts in a considerable amount of work before billing and months before receiving payment for its services. Many commercial contractors have a hard time securing traditional funding. Alternatives are available, but how do you decide which is the best for your business? When seeking a construction loan, you should consider the following factors in deciding which loan to pursue:
What is the capital for?
Commercial construction loans are often used to cover any number of a business’s needs, such as the cost of leasing equipment, payroll, 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. Some funding options, like Merchant Cash Advances, auto-debit hundreds of dollars from the borrower’s account every single day. If you will only be on a project for another three months and you have a six-month payback period on an MCA, then you need to know you have more work starting quickly and enough work to be able to actually afford the same daily payment in months four through six of the repayment period.
Surprised? That’s just the beginning.
Check out our Guide to Merchant Cash Advance Loans.
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.
Start your application today. Just answer these 3 questions!
Why would a subcontractor need a construction loan? Managing cash flow and staying above water can be difficult for any business, but the problem is especially prominent in the construction industry. Due to a complex and inefficient payment system, contractors have a nearly impossible task of covering the cost of a job, especially before the pre-construction phase begins and for the first three months after you mobilize and begin working on a particular site.
That system forces you to have upwards of 20% or more of the total project cost up front to cover things like bond and insurance premiums, materials, payroll, equipment and supplies. You won’t be paid for 60 or 90 days after a project begins—and that’s if everything goes just right.
Construction Loan Alternatives
For a smaller job, you may be able to scrape together funding from a bank on a personal line of credit or secure a loan, but that loan is based on your personal assets. It’s risky and there’s only so far that a business owner can go with that strategy.
Banks continue to be reluctant to offer small business loans to contractors after the economic collapse of the late 2000s. Yet, according to the Federal Reserve Bank of New York’s annual small business credit survey, 61% of employer small business’ faced financial challenges in 2016. The number one problem was securing the funds they needed to expand.
Another 17% of respondents said they couldn’t get the money to pay for inventory or buy what they needed to fulfill contracts.
Without taking on a partner and giving up some of the ownership of their company, there are few good options for smaller and mid-sized subcontractors who are interested in bidding on larger projects and elevating themselves to the next tier.
It’s common for contractors to limp along with the cash they have on hand and then bill the general contractor for the work completed in the first 30- or 60-day time period of the project.
Then, with cash reserves largely dried up, you start to feel the pressure. You may start to cut employee hours or hold off on ordering supplies. To stay afloat, you may turn to a factoring company.
Factoring companies purchase submitted and approved invoices and pay you, the subcontractor ,a percentage of the funds owed (typically about 80%). The general contractor then pays the factoring company the full invoice amount, which recoups their initial payment to the contractor as well as a fee for their service. Any remaining profit is then sent to you.
Benefits and Drawbacks of Factoring
Used correctly, factoring can be a useful tool for a subcontractor. But there are disadvantages, too. It’s a headache for general contractors, who find themselves inundated with paperwork. It’s stressful for the subcontractor too, as it may be viewed by the general contractor as a sign that you’re having financial troubles.
Merchant cash advance loans
What if you find yourself in such financial distress that you need payroll or equipment capital before you send the first invoice to your general contractor? This situation often results in a daily debit loan, which is when a company grants you a lump sum dependent on cash deposits in your company’s bank account and then the lender automatically deducts money from the company’s checking account on a daily or weekly basis until the loan is repaid in full.
The Slippery Slope of Cash Advance Loans
While daily debit loans and other cash advance loans have some benefits—they solve the immediate funds issue, have automatic repayment and can help boost business credit scores—they’re also difficult to sustain.
Cash advance loans are expensive and cannot be paid off early. And once the repayment schedule starts, the lender automatically deducts hundreds or even thousands of dollars from your account, making it more difficult to determine how much cash you really have on hand. You may be left feeling like you’ve solved one problem only to find you’ve caused a new one.
Learn more about the dangers of MCAs in the construction industry.
The problem with lump sum payments
Many contractors act under the mindset that if they could just get that extra $100,000 they need, everything else would work out. But that is often not the case.
A Cycle of Debt
Think about it from a personal finance perspective. If you as a business owner see that one of your employees immediately directs their paycheck to a payday lender, you can guess that employee is in a challenging financial situation. You hope it’s short term, but if you see the same behavior week after week, month after month, you know your employee is losing hundreds of dollars to fees and interest and is stuck in a spiral they can’t easily escape from.
By continuously turning to a factoring or daily debit company, your business is in the same boat as that employee. And like him, the situation is stunting your financial growth by spending money on interest rather than setting it aside for your next big project.
Properly allocating the lump sum once it comes in is often the worst part for subcontractors. If the money is spent working backward and paying for work that was already done, you’ll find yourself short again and likely need another loan to make it through to the next pay out. And the next. And the next. Each loan means more profit flying out of your pocket and into the lender’s.
And if the unexpected happens, like a weather delay or a change order, there is even potential for you to lose money on a particular project. Those cases put tremendous stress on the entire business model and put your future projects at risk.
Learn more about commercial construction financing.
Cash in on opportunity
In a perfect world, a subcontractor would grow slowly, setting aside money for each new job you pick up in order to fuel any upcoming projects. You’d have a great track record with estimating project costs low enough to keep you competitive, but have the bid high enough that you can turn a healthy profit and manage any setbacks that will arise.
The good news: Now is a great time for contractor growth.
The U.S. economy is booming and the construction industry is seeing explosive growth. Dozens of airports around the country are under major construction, or are ramping up to start their renovations. Developers and Fortune 500 companies need contractors now more than ever to build their massive technology centers, enormous housing developments and sprawling office parks. Opportunity is everywhere.
Now is the perfect time to grow your business, whether that growth is $100,000 to $500,000 or $3 million to $10 million. The trick is in doing your research to make sure you are financially prepared to make that leap.
A Cash Flow Partner
One of the best ways to move your business forward is to partner with a company that is committed to your mission and is knowledgeable about your industry. You need a company that is able to offer you the funds you need when you need them and sets a repayment plan in line with the cash flow cycles of your business. Having such a partnership allows you to focus on doing the high-quality work you were hired to do and minimize the stress of cash flow management along the way.
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