How Construction Business Loans Work

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Constructing a property requires significant resources, but not every construction company has enough cash available for each project. Construction business loans cover the difference. Companies use these loans to gain market share through leverage. Many businesses use loans to reach new customers and use lending partners like Mulligan Funding to get adequate financing. We’ll share how these loans can impact your business and the best ways to use a construction business loan. 

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How Do Construction Business Loans Work?

Construction companies take out short-term business loans to build or renovate a property. Most of these loans come with 6–24-month terms, but some extend 15-30 years. Longer loan terms cost less per month, letting you keep more of your cash flow. However, a longer loan also leads to more interest payments. You save more at the moment but pay more over the loan’s lifetime. 

Lenders will also require larger down payments since the property isn’t finished. An unfinished property is a less attractive collateral for the lender. You may have to find enough funds to make a 20% down payment on the loan. After making the down payment, the lender will give you a portion of the loan’s principal. Lenders hand out the loan amount based on a schedule instead of giving you the money immediately. This distinction sets commercial construction loans apart from small business loans. The lender gives you more of the loan’s amount based on milestones such as establishing the property’s foundation. You only receive additional funding if you move forward with the project.

Construction companies only pay interest on the money they borrow. Restricted funds tied to milestones don’t accumulate interest until the lender lets you access those funds.

What Can You Use Construction Business Loans For?

Construction business loans have several capabilities. We’ve outlined some of the common ways business owners use construction financing.

Land Acquisition

Acquiring land gives you a place to build a commercial or residential property. You can use a construction loan to finance the purchase. Some business owners buy land and don’t construct on it right away. Land is limited, and once land gets snatched up, another piece of land may not become available in the same area. You can acquire land to claim your stake and wait before constructing the property. Then, if you have enough funds or can get the necessary financing, you can start construction immediately.

Labor and Permits

You can’t buy land and immediately start building a property. Construction businesses must first obtain permits and written documents from a city or county that approves your construction activity. Obtaining permits and hiring workers to construct the property cost money. Construction companies can see a great return on their investment once the property gets built, but they have nothing until then. Construction companies can get financing to move the project along. 

Building Materials

Workers need the necessary materials to build your property. These materials add to your overall expenses. If you don’t have enough money for building materials, workers, and other costs, lenders like Mulligan Funding can give you the necessary funds to buy these resources.

Repairs and Renovations

Not every project requires building a structure from the ground up. Some clients want repairs and renovations. Under this circumstance, you can still get a construction loan. You’ll need the money for workers, materials, and other expenses.

Professional Fees

Every construction company gets a blueprint before building a property. Obtaining architectural designs from professionals is a necessary expense, and a construction loan can cover it. In addition, you can get financing for additional professional services such as appraisals and inspections.

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Construction Fees and Costs

You can use a construction loan for any fees and costs that occur during construction. Fees and costs vary, but you’ll have to pay several fees for loan origination. All of these fees can get tacked onto the loan’s principal.

Cash Flow Maintenance

Want some extra cash to pay salaries on time? Loans provide a war chest of funds you can tap into at any time. You can get a construction loan for this purpose, but a regular business loan without milestone-based distributions may make more sense.

Options For Construction Business Loans

Construction business owners can use several financial products to receive funds. We have outlined some of the most popular choices below.

Equipment Financing

Construction companies rely on equipment to build properties. Unfortunately, some equipment gets old and needs repairs. Other equipment becomes unusable, and you’ll have to buy a replacement. Equipment financing provides you with enough funds to purchase new equipment for your projects.

Invoice Factoring

Some construction companies have enough invoices to afford the equipment, wages, and other construction costs. However, clients aren’t paying invoices quickly enough. Some invoices aren’t due for several months, while other clients make late payments. 

You can use invoice factoring to raise capital for your company. Invoice factoring companies will buy your invoice at a set percentage of its face value. These companies will look at the client’s credit and payment history before deciding how much to give you for the invoice. The invoice factoring company gets a return on their investment by receiving the full invoice. You won’t receive invoice payments after selling the contract to an invoice factoring company, but you get immediate access to capital.

Invoice factoring lets you avoid debt. Once you sell an invoice, you don’t have to make monthly payments to the invoice factoring company. This approach can be a great revenue source if you currently can’t qualify for a loan. 

Business Line of Credit

You can use a business line of credit for any expense in your company. Business owners can borrow against this revolving line of credit at any moment. After you fully pay off the line of credit, it still remains accessible. You won’t have to apply for another line of credit to access your funds. 

Business owners only pay interest when they borrow against the line of credit. You won’t get penalized for holding onto this financing and keeping it dormant. A business line of credit can act as short-term financing to cover urgent expenses. A business line of credit typically comes with a higher interest rate unless secured with collateral.

SBA 7(a) Loan

SBA 7(a) loans are the next best option after traditional loans. While SBA loans come with stringent requirements, they’re easier to get than loans from traditional banks. You’ll have to demonstrate strong revenue and earnings along with a high credit score to qualify for a loan. The SBA does not give loans, but it backs loans from partners like Mulligan Funding. You can get short-term or long-term working capital depending on your needs. (*) Some business owners also use SBA 7(a) loans to refinance existing debt after becoming more established and within the loan’s qualification standards.

Where to Get Financing for Your Business

Capital gives you more choices. You can acquire land, afford workers, get architectural designs, and make other investments into your businesses. Money is a finite resource, and not every company in the construction industry has enough of it for its goals. Construction loans are a great solution, but with many lenders to choose from, where should you go? 

You should compare rates and terms across several lenders, but Mulligan Funding is a great starting point. Mulligan Funding offers access to loans for small businesses with possible next-day funding. (1) You can borrow between $5,000 and $2 million for your loan. You can request a free quote to see how much Mulligan Funding can help your company out with.  

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