Despite the uptick in construction, many firms are feeling hamstrung by the hesitancy of traditional banks to provide growth capital. Unfortunately for smaller players in construction, the small business lending process is not working well, with banks often reluctant to lend to smaller firms and offering high-rate and fee-laden business credit cards.
Some Small Business Administration loans are available, but they can be cumbersome to obtain, with many banks preferring not to offer SBA loans of less than $350,000. Fortunately, new online SBA options do exist. If you apply for some of these or other new online options—whether at a bank or through an alternative lender—construction firms should follow several tips to find the capital they need at a reasonable cost.
• Maintain a good credit score. Good personal and business credit scores will help you qualify for reasonably priced financing options. However, if the construction firm's owner has a history of bankruptcies or charge-offs, or if the business does not have a strong credit history, that can hurt the firm's ability to secure a low-priced loan. Business credit can be improved by creating a Data Universal Numbering System (DUNS) number and providing Dun & Bradstreet with past payment information and vendors.
Additionally, just as you monitor your suppliers' and vendors' credit ratings, your customers can monitor yours. You might lose business without knowing it. Also, commercial credit fraud is increasing, and you need to keep track of your business credit report for any transactions you did not initiate.
• Look at an SBA loan first. The Small Business Administration is an agency that supports entrepreneurs and small businesses. SBA loans are made through banks, credit unions and other lenders who partner with the SBA.
SBA loans have some of the lowest interest rates, longest terms and lowest monthly payments in the industry. If you can secure an SBA loan quickly from online providers, that may be the best option. Before applying though, check with your bank and make sure your company is asking for an allowable use of funds. The company must specify exactly how loan proceeds will be used in order to pass banking guidelines.
The loan also has to be demonstrably repayable. Management must provide documentation showing that the business has an ability to repay the loan. Typically, past business and personal tax returns as well as a business and personal debt schedule are used as evidence of repayment ability. A newly formed construction business will also likely need to provide a financial and business plan that projects the business' future cash flow.
Construction firms applying for SBA loans should understand the importance of accurate and updated paperwork, including documents relating to insurance, taxes and the structure of the business. The management applying for the loan will also need to demonstrate a positive tenure in the construction business so the lender can see the firm or the project has the greatest possible odds of success.
• Consider peer-to-peer lenders. If your business can't qualify for an SBA loan, then construction firms may want to look to marketplace-lending options. These lenders offer business term loans and lines of credit as well. With rates typically at 10% to 20%, these loans can be a good alternative if you don't mind the higher interest.
• Choose cash advance lenders as a last resort. Beware of expensive cash advance loans. Construction managers considering such financing should carefully weigh the risks and rewards. For example, if capital is borrowed from a cash advance lender, ideally it should be just a one-time infusion that helps complete a lucrative, nearly finished project. Similarly, if you're trying to grow your business, a credit card is usually not the right way to go, as the rates are a lot higher than other options.
Another drawback to using a credit card is the high annual fees, fees for late payments or fees for being over the borrowing limit. If you do need a credit card, be sure to read the terms and conditions on the credit card agreement carefully so you're aware of all the costs.
Evan Singer is the general manager of SmartBiz, the small business division of Better Finance, a venture-backed, technology-based finance company. For more information, visit smartbizloans.com.