19 Popular Construction Financing Options – What to Need Know About Each One

Financing Options Available to Commercial Construction

While this article may not have covered every possible option, we have provided an overview of the most commonly used construction funding options. Additionally, we have included a list of the typical advantages and disadvantages associated with these financing options to help contractors, subcontractors, and other professionals in the construction industry fund their projects.

1. Government Grants
2. SBA Loans
3. Private Grants and Subsidies
4. Traditional Bank Loans
5. Short-Term Business Loans
6. Business Line of Credit
7. Invoice Factoring
8. Merchant Cash Advance
9. Business Credit Cards
10. Equipment Financing
11. Material Purchasing & Financing
12. Supplier Trade Credit
13. Peer-to-Peer Lending
14. Venture Capital
15. Angel Investors
16. Crowdfunding
17. Personal Loans
18. Self-Funding/Bootstrapping
19. Family and Friends

1. Government Grants

Contractors may explore grants or subsidies available through national or local government agencies to support specific construction projects or initiatives.

PROS:

• Do not require repayment, reducing financial burden.
• Can provide substantial funding for specific projects or initiatives.
• May offer support and resources beyond financial assistance.
• Enhances credibility and reputation when chosen to receive grants.

CONS:

• Highly competitive and limited availability.
• Strict eligibility criteria and application requirements.
• Grants are often project-specific, limiting flexibility.
• Administrative and reporting obligations may be associated with grants.

2. Small Business Administration (SBA) Loans

The Small Business Administration, the US government agency, backs SBA construction loans. Participating lenders offer these loans designed to support small businesses seeking commercial construction financing, including construction sectors.

PROS:

• Lower down payment requirements.
• Longer repayment terms.
• Potentially more lenient eligibility criteria compared to traditional bank loans.
• Four loan types mean multiple options for potential funding.

CONS:

• Very slow application process.
• In-depth and difficult application requirements.
• Require collateral and personal guarantees.

3. Private Grants and Subsidies:

Private grants and subsidies specific to construction are financial assistance programs offered by industry associations or organizations to support construction-related initiatives. These programs aim to provide funding for specific projects, research and development, sustainable construction practices, or workforce training. Construction contractors can apply for grants to access non-repayable funds that help them advance their projects, adopt innovative practices, or promote industry development.

PROS:

• Non-repayable funds that do not impact debt obligations.
• Support for specific projects or initiatives.
• Enhances credibility and reputation.
• Potential access to additional resources beyond financial assistance.

CONS:

• Highly competitive and limited availability.
• Strict eligibility criteria and application requirements.
• Grants may be project-specific, limiting flexibility.
• Administrative and reporting obligations may be associated with grants.

4. Traditional Bank Loans:

Another popular construction financing option, bank loans are obtained from banks specifically tailored to meet the financial needs of contractors and subcontractors. These loans can be utilized for various purposes including purchasing equipment, financing construction projects, covering working capital needs, or expanding the contractor’s business operations. Traditional bank loans provide construction contractors with access to capital from established financial institutions.

PROS:

• Competitive interest rates relative to alternative lenders.
• Access to larger loan amounts.
• Relationship-building opportunities with the bank.
• Potential for building the business’s credit rating/history.

CONS:

• Often hesitant or simply choose to not work with the construction industry
• Stringent eligibility requirements, credit rating and history, and extensive documentation.
• Lengthy application and approval process.
• Collateral or personal guarantees are usually required.
• Limited flexibility in repayment terms compared to alternative lenders.
• Possible added risk with the current uncertainty surrounding bank closures.

5. Short-Term Business Loans:

These loans provide a lump sum of money that is repaid over a fixed period, typically less than a year. They can be a viable option for contractors needing quick commercial construction financing for specific projects or cash flow gaps.

PROS:

• Fast approval and funding process if the borrower has a good credit history.
• Repayment terms are typically shorter, avoiding long-term debt.
• Can be used for specific projects or cash flow gaps.
• May have lower interest rates compared to credit cards.

CONS:

• Interest rates may still be higher than long-term loans like traditional bank loans.
• Difficult if not impossible to obtain with less-than-perfect credit.
• Origination fees or other charges may apply.
• Short repayment periods may result in higher monthly payments.
• Requires regular fixed payments, which may strain cash flow.

6. Business Line of Credit:

Lines of credit provide contractors with access to a predetermined amount of money that can be withdrawn as needed. Interest is charged only on the amount borrowed, making it a flexible option for short-term cash needs.

PROS:

• Flexibility to access funds as needed.
• Can be used for various business purposes.
• Helps manage cash flow fluctuations.
• Interest is only charged on the borrowed amount.

CONS:

• Requires a good credit history and business financials.
• Some lenders may require collateral or personal guarantees.
• Interest rates can be higher compared to traditional loans.
• Over-borrowing can lead to excessive debt.

7. Accounts Receivable Invoice Factoring:

If the contractor has outstanding accounts receivable from completed work negatively affecting their cash flow, factoring can offer be a great solution. Known by many names — Invoice financing, Purchase Order (PO) financing, or Accounts Receivable (AR) factoring, factoring purchases a contractor’s outstanding invoices and provides a portion of the invoice value up front, typically around 80%, back to the contractor. The remaining balance (minus fees) is returned once the client settles the invoice.

PROS:

• Approval is not usually reliant on the contractor’s creditworthiness, but the original client’s.
• Because factoring is a purchase not a loan, there is minimal application paperwork.
• No collateral need — the invoice acts as collateral.
• The funding amount is based on the value of an invoice so you pick the amount you need based on which invoice you choose.
• Fast approval and payment — usually as soon as 48 hours.

CONS:

• Requires communication with clients potentially impacting relationships.
• The client’s creditworthiness may affect the financing terms or approval.
• If the client defaults, the contractor may be responsible for repayment.
• There may be minimum requirements on the volume of outstanding invoices being factored.
• Some factoring companies do not like to work with bonded construction companies.

>> RELATED READING: How to choose the right factoring company for your business

Within the broad category of factoring, there can be many subcategories of this construction financing option that benefit the contractor and subcontractor. Two popular ones are Spot Factoring (purchasing a single or a few invoices) and Bulk Factoring (committing to factor a specific number of invoices in exchange for lower rates).

8. Merchant Cash Advance Funding (MCA):

An MCA (also known as Business Cash Advance) is a type of loan where a lender provides a lump-sum payment to a business in exchange for a percentage of their future sales. They look at past sales numbers and estimate how much the contractor “should be able to afford” to pay. After approval, the loan payments are automatically pulled from their bank account until the advance, fees, and interest are repaid. If the contractor has solid and consistent deposits in the past, MCA loans can be relatively easy to obtain.

PROS:

• An unsecured form of financing so no collateral is required.
• Quick access to funds.
• Approval is based primarily on the contractor’s past sales volume or credit card transactions rather than credit history.

CONS:

• Very high fees and interest rates compared to other financing options.
• The automated daily/weekly deductions from bank accounts or changes to credit cards can put an even bigger strain on cash flow, especially during times of inconsistent billings.
• Almost no regulatory oversight — MCA funding may expose contractors to potential predatory lending, even illegal practices.
• Limited future scalability, especially for commercial businesses, since it is typically based on the contractor’s historical sales volume.

9. Business Credit Cards:

In select situations, credit cards can be useful for managing smaller day-to-day expenses, purchasing materials, and covering unexpected costs.

PROS:

• Quick and easy access to funds for day-to-day expenses.
• May come with rewards programs, points, or cash-back options.
• Can help build the business’s credit rating.
• Provides a consolidated record of expenses for accounting purposes.
• One of the quickest funding options of all these construction financing options.

CONS:

• Highest interest rates compared to other financing options.
• Overspending can lead to debt accumulation.
• Some vendors may not accept credit cards for large transactions.
• Fixed credit limits may not be sufficient for larger expenses.

10. Equipment Financing:

A subset in the area of construction financing, equipment financing is an arrangement made directly with an equipment manufacturer for the purchase or lease of equipment. This “rent to own” option can mean less cash will leave the business every month as payments are often spread across a longer time.

PROS:

• Allows contractors to acquire necessary equipment without a large upfront payment.
• Payments can be spread over the equipment’s useful life.
• Helps free up cash for other immediate needs.
• Equipment can serve as collateral for loans.

CONS:

• Monthly payments may be required, impacting cash flow.
• Interest rates and fees may increase the overall cost.
• Ownership of the equipment may be subject to loan repayment.
• Some lenders have restrictions on the type or age of equipment being financed.

11. Materials Purchasing/Financing

Another specialized subset in the construction financing world, materials purchasing is an option where a third party purchases project materials for a contractor or subcontractor in exchange for a fee.

PROS:

• The project’s materials can be purchased and delivered quickly.
• The project’s materials are shipped directly to the job site.
• The relationship with the material’s supplier is often strengthened as payment is made quicker.
• Suppliers often have strong, long-standing relationships with the materials funding company.

CONS:

• The fees involved can be higher than traditional bank loan fees.
• If the client has bad credit, this option may not be available to the contractor.
• In the event the client does not pay, the contractor will be responsible for repayment.

12. Supplier Trade Credit:

Long-term relationships with suppliers can lead to trade credit arrangements where contractors may delay payment for materials or services for a specified period. This can help the contractor through a cash flow crunch.

PROS:

• Can delay payment for materials or services, improving cash flow temporarily.
• Builds relationships with suppliers and potentially leads to favorable terms.
• May negotiate discounts or volume pricing with consistent business.
• Provides flexibility in managing short-term financial needs.

CONS:

• Relies on the willingness of suppliers to offer trade credit.
• Late payments can strain supplier relationships.
• Over-reliance on trade credit can affect cash flow in the long run.
• Supplier credit terms may not align with project timelines or payment schedules.

13. Peer-to-Peer Lending:

Peer-to-peer lending, also known as “P2P” lending, is a form of lending that connects individual lenders directly with borrowers through online platforms. It eliminates the need for traditional financial intermediaries such as banks. Borrowers can obtain loans by creating a profile on the platform, and individual lenders can choose to fund their loans. P2P lending offers an alternative to traditional bank loans and may have more flexible eligibility criteria and potentially faster approval processes.

PROS:

• Potentially quicker and easier application process.
• Less stringent eligibility criteria compared to traditional banks.
• Diverse funding sources from individual lenders.
• Competitive interest rates based on borrower creditworthiness.

CONS:

• Interest rates may be higher compared to traditional bank loans, especially when the borrower has a less-than-stellar credit rating.
• Platforms charge origination fees or other service charges.
• Limited loan amounts are available.
• Lack of personal connection with lenders compared to non-digital options.

14. Venture Capital Loans:

Venture capital for construction involves securing investment from venture capital firms that specialize in funding the construction industry. These firms provide substantial capital to contractors with high-growth potential and scalable business models. Venture capital funding can help construction contractors pursue large-scale projects, invest in advanced technology and equipment, or expand their operations. Venture capital firms not only offer financial support but also contribute strategic guidance, industry connections, and mentorship to help contractors achieve their growth objectives.

PROS:

• Significant funding is available for high-growth potential businesses.
• Access to experienced investors and their networks.
• Guidance and support for strategic growth and scalability.
• Potential for additional funding rounds in the future.

CONS:

• Loss of a significant portion of ownership and control.
• Extensive due diligence and negotiation processes.
• Investors may have specific expectations and timelines for the exit.
• Limited availability and high competition for venture capital funding.

15. Angel Investors:

Angel investors for construction contractors are individuals or groups who invest their capital in construction businesses in exchange for an ownership stake or equity. When these investors specialize in the construction industry, they provide funding to contractors with promising growth potential or innovative solutions. Beyond financial support, angel investors bring industry expertise, networks, and guidance to help contractors succeed. Construction contractors can benefit from the knowledge and resources of angel investors to expand their operations, invest in technology, or enter new markets.

PROS:

• Access to capital and potential industry expertise.
• Networking opportunities and mentorship from experienced investors.
• Less stringent requirements compared to traditional lenders.
• Potential for future funding rounds and growth support.

CONS:

• Dilution of ownership and control of the business.
• Investors may have a say in strategic decisions.
• Extensive due diligence and negotiation processes.
• Limited availability of angel investors in certain regions or industries.

16. Crowdfunding:

In certain unique cases, contractors can turn to internet-based crowdfunding platforms to raise funds for specific projects. Similar to the funding by Peer-to-peer, this method involves pitching the project to a large number of individual digital backers in platforms such as GoFundMe or SmartEngine who donate money in exchange for company products or “rewards”. In the construction venue, however, crowdfunding is typically Equity-based crowdfunding. This form of funding typically trades ownership shares/stakes in the construction business in exchange for helping fund the project.

PROS:

• Can generate funds from a large pool of potential backers.
• May help raise awareness for the construction project.
• Potential for additional exposure and marketing opportunities.
• Offers various reward options to incentivize backers.

CONS:

• Requires time and effort to create a compelling campaign.
• Not a great funding solution for ongoing construction projects.
• Funding success is not guaranteed if campaigns do not reach the funding goal.
• Backers may expect regular updates and deliverables.
• Crowdfunding platforms may charge fees or take a percentage of funds raised.

17. Personal Loans:

Contractors can consider personal loans from banks or online lenders to obtain quick cash.

PROS:

• Quick access to funds based on personal creditworthiness.
• Can be used for business purposes without requiring business financials.
• Provides flexibility in how the funds are utilized.
• May offer competitive interest rates for individuals with strong credit.

CONS:

• Personal liability for the loan, which could impact personal finances and taxes.
• Interest rates may be higher compared to traditional business loans.
• Loan amounts may be limited based on personal income and credit rating.
• Mixing personal and business finances can complicate accounting and taxes.

18. Self-Funding or Bootstrapping:

Self-funding or bootstrapping for construction contractors involves using personal savings, assets, or revenue generated by the contractor’s business to finance their construction projects and operations. This approach allows contractors to maintain full ownership and control of their business without relying on external investors or lenders. Construction contractors can leverage their own financial resources to fund equipment purchases, cover project costs, or invest in business growth. Self-funding requires careful financial planning and may involve slower growth compared to externally funded competitors.

PROS:

• Full ownership and control over the business.
• No debt or equity obligations to external parties.
• Flexibility in decision-making and resource allocation.
• Potential for higher profitability in the long run.

CONS:

• High personal financial risk is involved.
• Limited initial capital may restrict growth opportunities.
• Businesses have a slower growth rate compared to those with external funding.
• Pressure on personal finances and potential strain on cash flow.

19. Loans from Family and Friends:

Funding the “family and friends” method involves borrowing money from individuals within the contractor’s personal network, such as family members or close friends, to support construction projects or business expansion. This funding source provides contractors with quick access to capital without the need for extensive formalities or complex loan agreements. However, it is important to establish clear terms and repayment plans and maintain professional boundaries to preserve relationships.

PROS:

• Potential for quick access to funds.
• Flexible terms and potentially lower interest rates.
• Personal relationship and trust between borrower and lender.
• More forgiving eligibility criteria.

CONS:

• There can be a strain on personal relationships if repayment is delayed or defaulted.
• The lack of professional terms and documentation may lead to misunderstandings.
• Limited availability of funds from family and friends.
• Potential impact on personal finances and relationships if the business fails.

Now that you have a clearer understanding of the benefits of the most common financing options for the construction industry, selecting a funding solution should be less daunting and therefore quicker.

Next Steps?

When you decide on one of the specific choices, don’t hesitate to ask many questions as understanding each vendor’s unique terms is essential. And remember, the best choice today may not be the optimal choice in the future, so bookmark this article.

If you have specific inquiries about your company’s commercial construction financing needs, feel free to reach out to us. We’re here to provide guidance and support tailored to your unique funding needs.

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Article Sources:

1. U.S. Small Business Administration. “https://www.sba.gov/”
2. FDIC. “Failed Bank List. https://www.fdic.gov/bank-failures/failed-bank-list”
3. GoFundMe. “https://www.gofundme.com/”
4. SmartEngine. “https://www.startengine.com/”

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