Nearly two-thirds of small business owners use their own funds to start their companies. If you count equipment, vehicles, software, licenses, and insurance, these costs can be quite high. This is especially true for contractors.
Startup and ongoing costs can make long-term success seem out of reach. However, financing for contractors can provide the funds to build and expand a business.
From business credit cards to contractor business loans, there are plenty of ways to get funding. With an understanding of these different options, you can find the right type of credit for your specific situation.
In this article, we’ll discuss why contractors need financing and look at all the available small business financing options. Then, you’ll learn how to choose the best contractor financing options for your needs. We’ll end with tips to help you get approved for your chosen loan or credit type.
RELATED ARTICLE — How to Ask for a Deposit Politely: A Contractor Deposit Guide
Why Contractors Need Financing
Startup costs, such as buying tools and equipment, are major expenses for contractors. However, the need for financing for contractors goes well beyond these first purchases. Financing is often necessary to deal with specific challenges:
- Gaps in cash flow: Contractors pay materials, permitting, and subcontractor labor upfront. Customers often pay over time. This creates a cash flow gap that can make funding operations difficult.
- Price changes: The prices for materials can change. Some commodities, like lumber and metals, can suddenly become more expensive. This can add to cash flow woes.
- Seasonal changes: For many contractors, work changes seasonally. For instance, cash flow can dry up for roofers or landscapers in the wintertime.
- Estimate mistakes: Contractors often work on tight margins. A mistake in estimating labor or materials needed for a job could lead to financial loss. A couple of errors could severely damage cash flow.
- Expansion plans: It can be challenging to grow a business. Adding new services, crews, or equipment can strain a company’s current finances.
Financing for contractors can help with all these issues. It can serve as a bridge for cash flow gaps or material price spikes. Credit can pay the bills during the low season and cover mistakes or unexpected expenses.
Meanwhile, options like construction business loans can put expansion plans within reach for small contractors.
Each of these financial challenges is different. Certain types of financing for contractors will work in some situations but not others.
RELATED ARTICLE — The Business Benefits of Offering Homeowner Financing to Your Clients
Available Financing Options for Contractors
The types of financing for contractors are somewhat different than the kinds of consumer financing. It’s important to understand these differences and become familiar with how small business financing works. This will help you choose the right option for your needs and get the lowest possible interest rate.
These are the different contractor financing options:
Traditional Bank Loans
Regular bank loans are available for small businesses. They can be secured with property, equipment, or business equity. These are term loans. You will make regular payments according to the loan agreement until the loan and interest are paid off.
Business loans from banks are pretty straightforward and easy to understand. If you need significant funding to start your business or purchase tools and equipment, it could be a good option.
However, the lending minimums may be more than you need, and lenders could have strict requirements for applicants. You may not be approved unless you already have a well-established business.
Business Lines of Credit
A business line of credit is a pre-approved amount for revolving credit. It is like a credit card, but interest rates are typically lower. You do not have to draw all the credit at once. You can withdraw what you need and pay back the balance over time.
The obvious advantage of a line of credit is that you only borrow what you need. You can keep your debt as low as possible without having to deal with the high interest rates of credit cards.
Unfortunately, it can be difficult to qualify for a business line of credit. You typically need established business credentials and financial records. Startups may not be able to qualify.
Equipment Financing and Leasing
Equipment financing for contractors involves loans for equipment needed for the business. These loans are similar to auto loans. You borrow money to get the equipment, but the lender has a lien on it until you pay off the loan completely.
This is a great way to get equipment immediately to start your business.
A related option is to lease equipment. You won’t get ownership at the end of the lease period. However, the cost of a lease is less than the cost of purchasing the equipment. It can give you a safety net in case the business does not work out.
The negative aspect of equipment financing for contractors is that payments continue monthly, even if work slows down. This could potentially strain your budget.
Alternative Financing
Not every contractor qualifies for a traditional loan or line of credit, especially when starting out or handling short-term projects. That’s where alternative financing can help. These options are designed to provide faster, more flexible access to cash when you need it most.
One option is short-term working capital loans, which are meant to cover everyday expenses for a few weeks or months until you receive client payments. Another is project-based financing, which helps cover upfront costs like materials and labor and is paid back once the job is complete.
A good example of this type of funding is Joist Lending. With Joist, contractors can apply for quick, straightforward financing right inside the Joist app. Funds can be used for materials, equipment, or payroll. And the simple repayment terms make it easier to keep your business moving forward without interruptions.
While alternative loans sometimes come with higher rates than long-term bank loans, they can be a smart choice when speed and flexibility are most important. For contractors, having fast access to cash flow can make the difference between landing a big project and missing out.
Business Credit Cards
Business credit cards are similar to consumer credit cards. However, they are designed for business users. They are very useful for small purchases like tools, materials, and fuel.
Some credit cards can offer rewards, like cashback on business purchases. They are typically easy to qualify for if you have a decent credit history.
That said, interest rates are typically quite high. If you do not pay off the balance in a few months, the interest fees can really add up.
Invoice Factoring
Invoice factoring involves using unpaid invoices to secure a loan. The lender gives you the amount of money owed by the client. They take over the invoice, and the client pays them directly.
Invoice financing for contractors can be a way to access cash quickly. Lenders charge fees, but you do not have to go through a lengthy application process. Also, you don’t have to worry about accumulating interest charges.
However, fees can be high, and some clients may dislike having a third party try to collect their payments.
SBA Loans
The Small Business Administration (SBA) offers two types of loans.
SBA 7(a) loans are for capital to start and operate a business. The money can cover startup or operational costs until your business becomes profitable.
SBA 504 loans are secured loans for equipment, vehicles, or business real estate.
These are government-backed loans, so they have favorable terms. They have low interest rates and long repayment periods.
But SBA lending requirements can be very strict, and your credit history could come into play. The application process can also be very lengthy. New contractors may not have the documentation or history to qualify for an SBA loan.
FROM ONE OF OUR PARTNERS — What Is Invoice Factoring?
How to Choose the Right Financing Option for Your Business
There are two factors to consider when choosing the right contractor financing option. First is your financial need. Second is your chance of qualifying for the type of financing.
Here are things to consider to help you decide which financing options are best for you:
- Business size and age: Smaller and newer businesses may have trouble applying for traditional business loans or lines of credit. They need to consider credit cards or work with lenders who specialize in small business loans or startup funding.
- Credit history: The credit score of a business or its owner can affect loan applications. This is especially true for SBA loans and lines of credit.
- Timing: Do you need access to funds immediately, or can you wait for an application process? In most cases, fast funding comes with higher interest rates or fees.
- Repayment terms: You need to realistically be able to repay the money borrowed. Consider the repayment terms carefully and ensure you can repay on time.
For example, a driveway repair and replacement company might get an equipment loan for a new cement truck. They can get the truck immediately and use profits to make monthly payments. However, the company needs to be careful to save profits to make payments during the winter low season when they won’t have much work.
Or consider this case: a new contractor needs funding to begin operations and cover costs until they become profitable. The contractor wasn’t able to get an SBA 7(a) loan. They instead opted for several business credit cards. They plan to use the proceeds from their first contracts to pay off the balance before interest charges kick in.
FROM ONE OF OUR PARTNERS — 9 Ways to Finance a Business
4 Tips for Improving Your Chances of Approval
Choosing the right financing for contractors requires careful planning. Qualifying for contractor business loans requires building a credit history and documenting business finances.
However, there are steps you can take to increase your chances of getting approved for different types of small business financing:
- Consider collateral whenever possible. Secured loans are easier to get, and they have lower interest rates. Consider using equipment, property, or equity to secure a small business loan.
- Keep detailed records. Lenders will want to see your financial records. Keep well-organized books that show revenue and expenses. Do this even if your revenue is modest.
- Work on your personal credit score. Many small business lenders will look at the owner’s credit score. Increasing your own credit score can make it easier for your business to get loans.
- Build a credit history. Even if you don’t need credit, consider getting a business credit card. Or use credit with materials suppliers and pay them back quickly. This will build a positive business credit history, which will help you get approval for loans or lines of credit in the future.
Take the Next Step with Joist Lending
Finding the right financing option can be the key to keeping your contracting business strong and growing. If you’re ready to explore flexible financing made for contractors, check out Joist Lending.
You can apply for business loans directly in the Joist app. The process is simple, fast, and built with contractors in mind. So you can focus on running your business instead of worrying about paperwork.
