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Commercial Loans for Contractors and Other Alternatives

Written by Banks Editorial Team

Updated May 29, 2023​

3 min. read​

In the U.S., commercial construction is a sizable industry. Billions of dollars are spent on construction projects every month, some of them financed by commercial loans. Small and mid-size construction business owners work hard to take full advantage of the opportunities the market brings. However, staying afloat in the highly competitive and volatile industry is a challenge.

Financial problems are a common reason why construction businesses don’t seize available opportunities. A well-chosen commercial loan can solve various issues, helping construction companies stay on top of their game.

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What is a Commercial Construction Loan?

A commercial construction loan is a commercial loan given to contractors for various needs, including:

  • Purchasing new equipment
  • Purchasing or renovating a business property
  • Hiring and paying workers
  • Placing a bid on a construction project
  • Starting a new construction business or expanding an existing one
  • Promoting a construction business

Financial planning in the construction business is complicated. Since clients tend to delay payments, contractors face a disrupted cash flow. Due to the lack of available funds, they can miss out on large projects.

Commercial construction loans don’t always follow the same rules as traditional small business loans. For example, a small business loan can provide a lump sum of money to be used for the company’s needs. With a commercial construction loan, you may be facing a draw schedule.

Commercial construction loans are designed specifically to support contractors when they face slow seasons and payment delays. By taking advantage of these loans, construction companies can pursue new opportunities, retain their workforce, and maintain a good reputation.

How Commercial Loans Work

A commercial loan is a small business loan that helps companies cover business-related expenses. Commercial loan funding provides access to borrowed capital for businesses that need financial support. A commercial loan is likely to have:

  • Fixed repayment terms
  • Rates based on the credit score
  • Down payment or collateral

The amount and repayment terms of a commercial loan depend on the type of loan a business chooses.

It’s imperative to study commercial loan information as closely as possible to make sure that terms fit your needs. These loans often come with fees for processing, documentation, project review, and fund control. You must also find out if any penalties apply if you decide to pay the loan off early.

Alternatives to Commercial Loans

While commercial loans are beneficial for construction companies, several alternatives exist. It may be a good choice to consider an alternative to save time and money in some cases.

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Business Credit Cards

Business credit cards work similarly to personal credit cards. They are issued for a company instead of an individual. These credit cards are usually an excellent alternative to loans when a business needs to get money fast.

The approval time for business credit cards is short. The automated approval process results in nearly instantaneous decisions. Since numerous financial institutions offer business credit cards, you can find the one that suits your needs best.

Business credit cards usually have higher interest rates than personal credit cards. They come with a variety of fees and provide low limits.

Merchant Cash Advances

A merchant cash advance (MCA) gives you quick access to a lump sum of money in exchange for a part of your future profits. Instead of requiring fixed payments monthly, the lender automatically deducts a percentage of your credit and debit card sales until the amount is repaid in full.

An MCA is not a loan since it’s actually a sale of your future revenue. Accordingly, it’s not subject to regulations imposed on standard business loans. That’s why the approval decision doesn’t depend on your credit score.

An MCA is a quick way for the company to get the cash it needs without going through a slow loan approval process.

Marketplace Lending

Marketplace lending is using an online platform to connect borrowers with lenders. This way, you circumvent the bank and work directly with an investor. Once the connection is made, and the loan is given, the platform collects payments from the borrowers and sends them (minus fees) to investors.

The main benefits of this type of lending include a fast and straightforward approval process. However, it’s imperative to be extremely careful with the terms of such loans. Some lenders aren’t always straightforward about fees and requirements.

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Types of Commercial Loans

Different types of commercial loans exist. Some of them are:

  • Short-term commercial loans — more common for small business needs. They are granted for a variety of expenses, from equipment rental to payroll management. These loans generally need to be paid back within 1 – 5 years. Amounts begin at about $25,000.
  • Long-term commercial loans — usually granted for large real estate or equipment purchases or major capital expenses. They have to be repaid over a long period of time (5-10 years and beyond). The amount of such loans often exceeds $1 million.
  • SBA loans partially guaranteed by the U.S. Small Business Administration to give businesses more financing opportunities with low-interest rates and sizable repayment periods. However, these loans come with strict requirements and a lengthy approval process.
  • Equipment loans — explicitly designed to finance equipment purchases. The equipment serves as collateral for the loan.

The type of loan you choose depends on various factors, including financial goals, credit score, presence of collateral, interest rates, associated fees, and the desired amount.

How to Get a Commercial Loan

To get a commercial loan, you need to research the available options. Once you choose the right lender, you need to meet its requirements. They may include:

  • A good credit score (minimum credit score may vary from lender to lender)
  • Proof of collateral
  • Evidence of revenue
  • Explanation of how you plan to use the money
  • Business plan

Not all lenders have the same requirements. Some may not ask for collateral. Others don’t need to see a business plan. However, it pays to be as prepared as possible.

The next step is to fill out a loan application, submit the available documentation, and wait for a decision. Depending on the lender, the approval process can take anywhere between 24 hours to several weeks.

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