When unpaid invoices leave your construction company in a cash flow quandary, where do you turn to get the money you need to invest in your next project or pay off business expenses? For many contractors, the immediate answer is to seek out a bank loan. This is definitely an option, and for some, it may be the right one. For others, however, it may prove too time-consuming and complicated to be feasible for their needs.

If you’re unsure whether or not a bank loan is the right path for your construction business, consider the process you’ll need to undertake in order to secure your loan. This includes a lengthy pre-approval process before the bank even decides to move forward with full underwriting procedures.

Let’s take a look at an overview of the pre-approval and underwriting process to see if a bank loan is the best choice for your construction company.

The Preliminary Discussion

Before you even begin the process, you’ll need to sit down with your lender to discuss the current interest rates and all loan policies such as Loan-to-Value Ratio (LTV) and Debt-service Coverage Ratio (DSCR).

You may need to submit preliminary documentation at this time such as a pro forma, although the lender may construct their own pro forma based on their own criteria. At this point, the lender will likely need to have a private discussion with a senior advisor before agreeing to move forward with the process.

Construction Loan Documentation

For the next step in the process, the bank will require you to supply certain additional documentation such as:

  • Profit & Loss statements for several years and YTD
  • Balance Sheets
  • Cash Flow Statements
  • Booked Backlog
  • Aging Accounts Receivables and Payables
  • Guarantor tax returns
  • A schedule of owned assets, (equipment and real estate)
  • Contingent liabilities for the guarantors
  • Any other documentation that can support the loan request

These are only the typical documents banks require. Your lender may ask for additional pieces of information.

Other Factors Banks Consider for Construction Loans

In addition to the documentation, your bank will also need to evaluate the overall industry market and local market conditions. As banks consider construction a high-risk industry, they may dig deeper into your operational history and management team.

Determination of Loan Amount

Once the necessary documentation has been submitted, reviewed, and approved, the bank will then use the calculated Net Operating Income, LTV, and DSCR to conduct a Maximum Loan Analysis. The maximum loan amount your company can support will be determined based on these calculations. 

A Lengthy Process for a Short-Term Problem

Bank loans are perhaps the obvious solution to a cash flow problem, but not necessarily the best choice available, especially if you have experienced tough times. They require a lot of paperwork and a lot of time. And the person making the decision to loan your business money will often want the “safest” for the bank, not wanting to take any risk. If you need a loan solely to pay off a few unpaid invoices, the right solution for your company may be found elsewhere.

What to Do When a Bank is NOT a Good Fit

There are easier and faster ways to get the cash when getting a bank loan is not a good fit. Invoice factoring might be an option. Designed to help you get a temporary cash flow boost, factoring can quickly help you keep your business running by purchasing your invoices, and giving you up-front cash while the factor waits for the payment.

Construction factoring can often get you up to 80% of your invoice amount within 3-4 days. But how do you know if factoring is better than a bank loan for your construction company? Give us a call or contact us. We can walk you through your financing options… whether it is factoring, spot financing, or any other of the available cash flow-producing options for you.

Related Reading: Pre-purchased Construction Materials – Saving Both Time and Money

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