Are you looking to start your own construction business? Maybe are already trading but need an injection of cash so that you can take on bigger jobs. Either way, there are several funding options out there for you to explore.
When choosing how to fund your construction business, it is important that you do your research and think carefully about which type of finance aligns best with your company.
In this guide, you will discover all the options available to you as a business owner in the construction industry, so that you can make the right choice for you and your business.
Business loans
There are two types of business loans that you may want to consider for your construction business: secured loans and unsecured loans. The former requires some sort of collateral, such as a car, house, or another valuable asset. The latter requires no collateral but is based on how creditworthy the borrower is.
Secured loans are often taken out by individuals who do not have a good credit rating or credit score or who are taking out a larger loan to buy a property. On the other hand, unsecured business loans tend to be smaller amounts as there is more risk to the lender.
Hard money loans
Hard money loans are a type of loan that is secured by real property. These are primarily used in property transactions making them a good choice for construction businesses that are looking to buy and renovate properties.
You do not normally need to have a good credit score or credit rating to qualify for a hard money loan, but these tend to come with slightly higher interest rates and shorter repayment terms.
If you are looking for private individuals that loan money, make sure you choose someone with a good reputation in the lending business.
Invoice finance
Invoice finance is when a lender uses an unpaid invoice as security for funding. This type of loan agreement enables you to access finance for cash flow or investment purposes, using an untapped asset on your balance sheet.
There are two main types of invoice finance: invoice factoring and invoice discounting. The former allows businesses to generate money from unpaid invoices; typically, the lender will lend you up to 90% of the total value of said invoices. With this type of invoice finance, the lender will credit-check potential customers, which means they will likely know that you are using an invoice factoring provider.
Invoice discounting works in much the same way, but your business remains in control of customer payments, and the lender will not credit check your customers.
Personal loans
Personal loans are a form of credit, and, unlike business loans, these are paid to you as an individual rather than to your company. This means lenders will assess your eligibility based on your credit rating and financial situation rather than your business’ finances and future forecasts.
Taking out a personal loan to fund your construction business is a bit risky as, if your business fails, you will be personally liable for paying back the loan. To qualify for a personal loan, you will need to have a good credit score, and you will also need some form of regular income to reassure lenders that you can afford the monthly repayments.
Do not be tempted by bad credit personal loans, as these tend to have very high interest rates and also come with more restrictions.
Crowdfunding
Crowdfunding is a relatively new phenomenon that enables individuals, groups, and businesses to raise money. As an alternative to traditional business loans, crowdfunding can also help connect you with potential customers when you are still fundraising.
There are several different types of crowdfunding including reward-based, equity-based, debt-based, and donation-based so if you are going to go down this funding route, you need to make sure you pick the right type for your business.
Some of the advantages of crowdfunding include you may not need to repay the money, there will be no credit checks carried out and you can avoid the high costs of a business loan. That being said, there is no guarantee that you will get the money you need; the fees can be steep and may take longer than other funding methods.
Family and friends
Although this is not an option for everyone, it can be worthwhile talking to your family and friends about your business to see if they would be interested in investing or lending you some money to get started or expand.
There are pros and cons to this type of arrangement. On the plus side, you are unlikely to have to pay high interest levels when borrowing money from family or friends. However, if the worst happens and your business fails or you encounter a cash flow problem and can’t make your repayments, it can cause tension.
How to choose a lender/investor for your construction business
When choosing either a lender or an investor for your construction business, there are several factors that you need to consider:
What are your preferred loan terms?
Before you commit to a lender, you need to make sure you are happy with their loan terms, both in terms of the rate of interest you will need to pay, your monthly repayment amount, and the duration of your loan agreement.
How long will the loan process take?
Consider how quickly you need access to the money for your business as some loan methods take longer to process than others. As a general rule, hard money loans are the fastest, with most being approved in under seven days.
How do the rates compare to other lenders?
Make sure you take the time to compare different rates, as you don’t want to pay more interest than you need to. It is worth knowing that, if a rate seems too good to be true, it probably is.
Are there any hidden fees or clauses?
Always read the fine print when agreeing to a loan agreement, as this is often where less reputable lenders conceal hidden fees or clauses.