18 Nov Securing Financing for Your Construction Business: What You Need to Know
Securing financing for your construction business is a crucial step in ensuring its growth and long-term success. With the unique financial demands that come with running a construction company, finding suitable funding options can make all the difference. A well-structured financing plan is essential for managing cash flow during projects, purchasing new equipment, and expanding operations. In this guide, we will explore key financing options tailored to construction companies, the steps to take when securing a line of credit, and expert tips to improve your chances of loan approval. Whether you are just starting out or planning for expansion, understanding your financing options is the foundation for a thriving construction business.
Financing Options for Construction Companies
There are several financing options for construction companies, but one of the best routes is through the Small Business Administration (SBA). I'm a big fan of SBA lines of credit, as they can be secured or unsecured. These lines of credit are particularly appealing because you only pay interest on the balance you have drawn. In other words, you borrow what you need and pay interest on it while it is outstanding. Once it is paid off, you are no longer required to make any further payments.
Securing Lines of Credit
Construction companies must prioritize accurate bookkeeping to secure lines of credit or other financing opportunities. Lenders will often request tax returns and financial projections, commonly referred to as pro forma statements. These projections typically span one year, two, three, and sometimes even five years into the future. We assist businesses in determining their growth trajectory and managing their finances so that we can prepare a solid pro forma to present to lenders.
Construction companies should aim for profitable years to boost their chances of securing financing approval. It is a catch-22 because businesses often try to minimize taxes by reducing their profits. However, to secure financing, a healthy profit is generally essential.
How We Can Help
We review our client's marketing strategies and assess their current growth during this process. We also closely examine their future growth plans, especially in terms of the results they expect from their marketing efforts. On top of that, we evaluate what additional manpower, equipment, or software they might need as they continue to expand.
Recently, we worked with a concrete company that needed an SBA loan to move into a new building. The building secured the loan, but they had to demonstrate a certain amount of projected profit to meet the loan's requirements. Through cross-analysis and financial projections, we developed a pro forma that detailed exactly what they needed to do to qualify for the loan and how they could meet the lender's criteria.
Tips for Improving Loan Approval Odds
I would recommend working with an expert or broker with access to multiple financing options. Brokers usually provide more flexibility than banks or credit unions. However, if you opt to go with a bank or credit union, be sure to choose one with a solid track record in SBA funding.
One big mistake construction companies often make is applying for financing only when they need funds. Securing better loans with more favorable interest rates takes time, and if you wait until you need the money, the process will likely be too slow. The most intelligent approach is to plan and secure financing before it becomes urgent.
Conclusion
Securing the right financing for your construction business can be the key to unlocking its full potential. By exploring various options, such as SBA lines of credit, preparing solid financial statements, and planning, you can ensure your business has the financial backing it needs to grow and succeed. Whether you are looking to expand your operations, invest in new equipment, or improve cash flow, working with an experienced financial advisor like Foundation Accounting & Consulting can make the process smoother and increase your chances of securing favorable loan terms. Your construction company can thrive in today's competitive market with the right strategy.
