Different industries face different challenges in their time of business. Operating a construction business for example face their own unique set of challenges such as heavy regulations, high insurance rates, and licensing and permit requirements. Price increases in raw materials, tariffs, fuel and labor prices add to the challenge’s construction businesses face. Due to these challenges, many construction business owners experience cash flow issues that prevent them from paying invoices, purchasing equipment, and even paying their employees. Issues with cash flow can ultimately result in the construction business to fail.
Despite these challenges, the construction industry in the United States continues to grow. Fortunately, there are ways to get access to capital with a construction business line of credit. A construction line of credit will allow you to handle cash flow issues and drive your business into a successful path for growth. In this article we are going to discuss how construction lines of credit work.
Types of Construction Line of Credit
Lines of credit help businesses cover expenses such as cash flow shortages, daily expenses, large purchases and more. A line of credit is like a credit card in which it is flexible, and the funds are there whenever you need without having to reapply. You can spend up to your limit and only pay interest on the amount you borrow.
There are specific lines of credit for construction businesses which include the following:
- New construction loan: this loan is a short-term financing option that allows you to borrow capital to buy a lot or build a new home to sell.
- Construction-to-Permanent loan: with this loan you can receive the funds you need to cover the construction costs of a home. Once the home is built, the loan turns into a mortgage.
- Renovation construction loan: this loan is great if you are buying a fixer upper home that you want to sell in the future.
Requirements for Construction Lines of Credit
To take out a construction line of credit, lenders will typically look at the following:
- Income: lenders will look at your income and you will be required to prove your monthly or annual income before taxes. At least $100,000 in an annual income is required.
- Credit history: try to aim for a credit score of 680 or higher to receive a good interest rate. The higher your credit score is, the lower your interest rate and favorable terms you will have.
- Outstanding debts: try to keep your debt-to-income ratio to less than 45%. Lenders will know what your current balances are on your loans and credit cards by looking at your credit report.
- Construction plan: having a solid construction plan will let the lender know how you are planning to use the funds. Information such as the materials and tools you plan to use is something that should be included in your plan.
- Down payment: a down payment between 20%-25% will be required.
Benefits of Construction Business Loans
Construction business loans can benefit your business in the following ways:
With a construction business loan, you will have enough cash flow to handle any expenses that come up. It is important to have enough cash for whenever there are slow sales cycles or unexpected emergencies that arise.
Without financing, your business may have difficulty in covering daily expenses that are essential to grow your business. Loans provide you more freedom because you will have the money to pay for those expenses for your business.
Any construction business needs equipment, but it can be quite expensive. With a construction loan you will have the funds you need to purchase equipment for your business. Even when a machine breaks down, you will have to either repair it or replace it.
Hire a Team
You will be able to have the contractors you need for your business because you will be able to hire or invest in them so they have the experience and training they need to help your business succeed. Too few people helping you run your business can make slow growth and progress in the business.
Additional Options for Construction Businesses
If you have determined that a line of credit is not a good fit for your construction business, there are additional options to consider.
SBA loans are a great option with low rates. They also have long loan terms and lower down payment requirements. However, they are not as easy to be approved for as lines of credit because these loans have a stricter business credit and other eligibility requirement.
Business Credit Cards
Business credit cards act as short-term, interest-free funding and can help you track your spending and build your credit for future business loans you will need. They come with points or cash back whenever you spend as well.
The Bottom Line
Having a construction business line of credit for your business can help it grow and succeed. There are many benefits that come with a line of credit but it is important to make sure you do your research so you know what you are signing up for and are getting the best deal that works for you.