19 Commercial Construction Financing Options – The Choices Made Easy

With numerous financing options available in the commercial construction industry, choosing the most suitable one for your construction company can be challenging. When is a commercial bank loan the right choice? When should you pick factoring over a Merchant Cash Advance (MCA)? We understand the complexities involved and assist you by doing the homework and research. Our goal is to offer an overview of the “best” construction financing solutions, ensuring you don’t waste valuable time applying for the wrong option.

Top Construction Financing Options – The Comprehensive List

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 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

SBA Construction loans are backed by the Small Business Administration, the US government agency. These loans are offered by participating lenders and are designed to support small businesses, including construction contractors.

PROS:

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

CONS:

• Slow application process.
• In-depth application process.
• May 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 the construction contractors. 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 history.

CONS:

• Stringent eligibility requirements and documentation.
• Lengthy application and approval process.
• Collateral or personal guarantees may be required.
• Limited flexibility in repayment terms compared to alternative lenders.
• The current climate of anxiety 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 cash 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.
• 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. Invoice Factoring:

If the contractor has outstanding invoices from completed work negatively affecting their cash flow, factoring may be a good solution. Often known by many names such as Invoice financing, Purchase Order (PO) financing, or Accounts Receivable (AR) financing, factoring purchases a contractor’s invoices and then provides a portion of the invoice value, typically around 80%, back to the contractor. The remaining balance (minus fees) is returned once the client settles the invoice.

Within the broad category of factoring, there can be many subcategories that benefit the contractor such as Spot factoring (purchasing one or a few invoices) or Government Contracts factoring (purchasing invoices with the unique rules and regulations involved within government contracts).

PROS:

• Provides immediate cash flow by converting outstanding invoices into funds.
• The financing amount is based on the value of invoices, not the contractor’s creditworthiness.
• Payment is quick, factors do not wait for clients to pay their invoices.
• Helps bridge cashflow gaps between project completion and payment.

CONS:

• Fees and discount rates can reduce the amount received.
• Requires communication with clients potentially impacting relationships.
• The client’s creditworthiness may affect the financing terms.
• There may be requirements on the volume of outstanding invoices being factored.
• Some factors do not like to work with bonded construction companies.

RELATED READING: Invoice Factoring: EVERYTHING You Need to Know

8. Merchant Cash Advance Funding (MCA):

An MCA (also sometimes referred to as a Business Cash Advance) is a construction financing option where a lender provides a lump sum payment to a construction contractor in exchange for a percentage of the business’s future credit card or debit card sales. The lender recoups the advance by automatically pulling a portion of the contractor’s daily sales from their bank account until the advance, fees, and interest are repaid. If the contractor has solid credit/debit card sales numbers in the past, the MCA can be relatively easy to obtain.

PROS:

• Quick access to funds.
• Flexible repayment structure – repayment is tied to the contractor’s sales.
• Typically focused more on the contractor’s sales volume and credit card transactions rather than credit history.
• An unsecured form of financing so no collateral is required.

CONS:

• Very high fees and interest rates compared to other financing options.
• Automated daily/weekly deductions from bank accounts or changing of credit cards can put an even bigger strain on cash flow.
• Lack of regulatory oversight – MCA funding may expose contractors to potential predatory lending practices.
• Limited future scalability 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 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:

• High-interest rates compared to other financing options.
• Overspending can lead to debt accumulation.
• Some vendors may not accept credit cards for large transactions.
• Limited credit limits may not be sufficient for significant 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 allow more cash to stay in the business as payments are spread across time.

PROS:

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

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 may have restrictions on the type or age of equipment being financed.

11. Material Financing

Another specialized subset of the construction financing options world, material financing is where a third party purchases a contractor’s or subcontractor’s project materials 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 material 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.
• 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 contractors involves securing investment from venture capital firms that often 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 SeedInvest 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:

• Success is not guaranteed, and campaigns may not reach the funding goal.
• Requires time and effort to create a compelling campaign.
• 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 commercial construction financing options, selecting a funding solution should be less daunting and therefore quicker. 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 financial needs, feel free to reach out to us. We’re here to provide guidance and support tailored to your unique situation.

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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/resources/resolutions/bank-failures/failed-bank-list/”
3. GoFundMe. “https://www.gofundme.com/”
4. SeedInvest. “https://www.seedinvest.com/”

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