Construction Company Financing with Bad Credit

As the leader of a construction company, you play a vital role in your community. You’ll be helping people build their dream homes. Despite this, traditional lenders make it hard to get financing even if you have a perfect financial history. For those with bad credit, getting a loan from the bank can be close to impossible.

But there is good news. There are plenty of alternative funding providers who will be able to help you out, offering a wide variety of loans. Let’s take a closer look at this type of financing and how you can use it to your benefit.

Why Are Lenders Reluctant to Offer Bad Credit Loans?

The unique nature of the construction industry explains why traditional lenders are so uneasy about giving loans. Usually, when a loan is made it will be secured by collateral. Should something go wrong, the lender will be able to claim those items and sell them to recoup the costs of the loan.

However, this is hard for those in the construction industry. After all, the assets usually haven’t been built yet.

 Traditional Lenders Vs Alternative Financing Providers

There are a few key differences between a traditional bank and an alternative financing provider. First, you will still be eligible for alternative loans if you have a few problems in your financial history. We’ll look at some of the factors that they will consider a little later.

Next, traditional lenders will take a long time to consider your application and decide whether you should be approved. Sometimes, it will be several weeks before you get the money you need. This kind of delay can be frustrating. Alternative financiers will be able to get you fast cash, delivering within a matter of days.

Even better, alternative lenders can offer a more flexible arrangement. There is a wide range of construction business loans you can explore.  

Types of Financing Options

There are a few types of construction business loans that you can try. It’s a good idea to look through each of these options, finding the one that best suits you.

Equipment Financing

A construction company will require a lot of equipment to operate effectively. However, purchasing this heavy equipment will be expensive. This is where an equipment financing loan can help. You’ll be able to use the equipment you are purchasing to help collateralize the loan.

You’ll need to make monthly repayments on your loan. At the end of the period, you will own the assets. This is the best approach to take for equipment that you plan to use over the long-term.

Leasing Equipment

An alternative to an equipment loan is taking out a lease. You’ll still need to stick to a monthly payment plan, but you won’t own the equipment at the end of the lease period. These tend to be cheaper than loaning, as you aren’t building equity. This option might be best for equipment that you only need to use for a limited period of time.

Secured and Unsecured Loans

You might want to consider getting a contractor loan. There are a few ways an alternative financier can help you do this. First, you might want to get a secured loan. This is typically used when purchasing things like equipment. Should the loan turn bad, the lender will be able to seize the item. Because it is collateralized, these loans often come with lower interest rates.

On the other hand, you might want to use an unsecured loan. These won’t require any collateral. However, you will be held personally accountable if you are unable to make your loan payments. How much these loans are worth will vary. You can get between $10,000 to $500,000, depending on your needs.

Unsecured Business Line of Credit

This is one of the most flexible approaches. In this case, you’ll be able to apply for a line of credit. Once approved, you’ll be told the maximum amount that you can purchase. Then, you can draw on this line of credit whenever you have expenses you require. You’ll only need to pay interest on the credit that you are using.  

SBA Loans

These are considered the gold standard of loans, as they are backed by the US government. However, this means that they will come with more paperwork than the other options on the list. They also come with a more limited range of uses. Here are some of the things you can use this loan for:

• Purchasing equipment
• Financing a construction project
• Expanding your existing business

It should be noted that these loans can be big enough to allow you to buy real estate, if you plan on developing the buildings yourself. You might also want to consider a new construction bridging loan when the project is completed.

Other Types of Construction Company Financing

There are a few other ways to finance your construction company. These include:

• You might want to sell of a stake in your construction company in exchange for money. But you’ll need to be careful about doing this. You’ll also be giving some control away and you’ll be expected to consult with investors before you make a decision.
• Selling assets. Sometimes, you might find yourself in a difficult financial situation, where you are forced to find money fast. In this case, some business owners might be forced to liquidate some assets.
• For some types of businesses, turning to friends and family can be a good way of getting the money needed to start a business. The problem is that construction equipment tends to be quite expensive. It can usually be thousands of dollars. It will be hard to raise this much money with a crowdfunding campaign.

Sometimes, you can pair traditional construction loans will one of these funding methods.

Applying For Construction Company Financing

As we’ve seen, there are a wide range of contractor loans that you can explore. The first thing to do is think about which one will best suit you. Sometimes, you might want to take out a couple of loans. You can get a longer-term one to get the equipment you need to start building. Something like a line of credit can be used to deal with any unexpected expenses you incur during the construction process.

The next thing you need to do is check the minimum requirements, to make sure that you qualify for the loan. In most cases, you will need to be able to show that you have a few months of experience under your belt.

The next thing you need to do is fill out the application form. The good news is that this process is very simple.  Everything is online and you’ll only need to fill out a few pages of information. Generally, it will only take a few minutes to apply for construction company financing.

What’s The Standard Credit Score Required For A Construction Loan?

Many lenders will want to look at your credit score before deciding if you are a good candidate for a loan. Usually, in the construction industry, they’ll want to see that you have a FICO score above 650.

If you have bad credit, this won’t always be possible. The good news is that there are some other loan types that you can pursue. You might want to get something that is based on your monthly revenues instead. This is good for construction companies who have established a track record of success.

How Long Does It Take to Get Approved?

When you go through a traditional lender, it’s common for it to take several weeks for them to assess your application and decide if they are going to approve you. Alternative lenders understand that time is money, so they work on speeding up this process.  In this case, you’ll be able to get assessed and approved within a few days. In many cases, you’ll get the money within two to seven days.

The only exception to this is the SBA loans. They take a little longer to get approved, as they need to go through government regulations. In this case, you can expect to have a decision within two to four weeks. Getting the money, though, will take between three to four months.

How Much Does It Cost to Start A Construction Company?

Before you can apply for a loan, you’ll need to decide how much money you need. In this case, there are a few things you’ll need to consider, these include:

• Equipment costs. Sometimes, you will already have all the equipment you need. If you don’t, you’ll need to either loan or lease it. This can be very expensive, with many of these machines costing thousands of dollars. So, think about the type of construction you are doing and which machines you’ll require.
• You’ll also need to have the materials you need to finish the construction project. A few calls to suppliers will give you a rough idea of the costs.
• Real estate. Some construction companies will work for clients. Others plan on buying the real estate and developing the area. In this case, you’ll need substantially more money.

It’s a good idea to apply for a little more than you will need. This gives you a little cushion if the prices suddenly increase.

Tips to Improve Your Chances of Getting A Construction Company Loan

Applying for a loan can be daunting. You don’t want to risk being rejected. There are a few simple things you can do to make sure that this doesn’t happen to you.

Improving Your Credit Score

Bad credit can hamper your ability to get a loan and mean that you’ll need to pay higher interest rates, to compensate lenders for the additional risk. The good news is that your credit score isn’t static. There are a few simple things you can do to improve your score.

First, it’s a good idea to pay down your debts. Making future payments on-time will also help you improve your credit score. It’s a good idea to read through the credit report. Look for anything that is inaccurate. You can report these and get the mistakes removed. This can allow you to improve your credit score fast.

It will often take a few months for these changes to start appearing in the credit score. But they will help you build good financial habits.

Build A Business Plan

There are a few reasons why you might want to get a business plan. First, it shows that you are serious about your business. This helps give lenders confidence to trust you with their money.

Plus, if you are successful getting a loan, you’ll know how to best put the money to use. This will allow you to start growing your construction company.

Read The Loan Agreement Carefully

Before you sign up for a loan, read through the documentation carefully. First, you want to make sure that you qualify for the loan. You also want to make sure that you’ll be able to keep up with the debt obligations.

If you’ve already taken out the loan and you are starting to struggle, it’s a good idea to call the lender and talk about the situation. Alternative lenders are often easier to talk to than the big banks. They’ll be able to help you come up with a solution.

Do You Need To Save Up For A Deposit?

Usually, you will need to get a deposit before you’ll be able to get approved for a loan. But this isn’t something that you need to worry about when you are using an alternative finance provider. This makes these types of loans even more accessible.

Conclusion

The construction industry can be tough. Even companies with a perfect credit record will find it hard to convince the bankers to give them money. Thankfully, if you have a bad credit score, an alternative lender will be able to step in and give you the money you need to take control of your business.

If you want to find out more about bad credit construction company financing, give the friendly team at South Florida Funding a group a call on 786-544-2700. We’d love to talk you through your options and help you find the right loan for you.