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General Contractor Financing: Improve Your Cash Flow

Written by Banks Editorial Team

Updated May 29, 2023​

4 min. read​

contractor financing

Contractors in the commercial construction industry face many difficulties financing their businesses. Launching a commercial construction project requires buying building materials, getting bonds and insurance, maintaining equipment (or even buying new equipment) and making payroll. All this takes a lot of cash, but it may be months until your clients pay. What are a general contractor’s financing options?

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What is Contractor Financing?

Financing for contractors provides capital contractors can use to pay overhead and project expenses when they lack sufficient cash reserves to do so. In a cyclical industry such as commercial contracting, getting financing can help contractors maintain financial stability despite slow-paying clients. Contractor financing comes in many forms, from loans to lines of credit or vendor trade accounts. Each of these options has its pros and cons.

The Benefits of Getting Financing for Your Business

Few contractors could run a successful commercial contracting business without some type of financing. Financing has many benefits compared to operating solely from your cash reserves.

Improve Your Business Cash Flow

Without adequate cash flow, your contracting business risks losing key employees, losing clients or going out of business altogether. Contractor financing can eliminate the juggling act of deciding which bills to pay and which to delay. You will have the cash you need to pay your employees and subcontractors, buy materials and keep your projects on schedule.

Close Jobs Faster

People joke that construction projects always take longer than expected. Often, that’s because contractors don’t have the capital on hand to purchase the necessary building materials to move forward until they get paid. Closing out jobs on time keeps clients happy and helps your contracting business secure new ones. It also frees you up to move onto the next big project and keep the profits coming.

Land Bigger Projects

Ok, so construction bidding for that massive project is over. Good news: You got the job. Bad news: You’re not 100% sure how you’ll pay for it, or kick it off. There are a lot of upfront costs you’ll need to cover. Taking on bigger commercial construction projects stretches your firm’s capacities and builds a reputation, but can also stretch your cash flow to the breaking point. Construction financing offers a solution that helps your business land bigger, more profitable projects.

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Grow Your Construction Business

It takes money to make money. Growing your construction business requires money to hire qualified skilled labor, market to new clients, and buy new equipment. Without construction financing, you may get stuck playing in the minors instead of the big leagues. Financing can provide the working capital you need to attract top employees and market to bigger and better clients.

How to Get Financing for Your Commercial Construction Business

Now that you know all the benefits of contractor financing, what are the options for getting financing for your business?

Alternative Contractor Financing

Alternative financing solutions are online lenders that have less paperwork and less stringent requirements for loan approval compared to traditional banks. Instead of submitting piles of paperwork, you typically give the lender access to your financial data and bank account information, so they can assess whether you’re credit worthy and within their parameters of credit policy. You’ll generally have to meet some requirements for a minimum time in business and minimum annual sales. Interest rates will also be higher than bank loans. However, if you qualify, you can often get an answer within a day and receive financing almost immediately.

Material Financing for General Contractors

Getting trade credit from your building material suppliers is a short-term financing option that can buy you a little time when purchasing necessary materials. If your credit is good and your trade credit account is approved, you can buy what you need and not have the bill come due for 30 to 45 days, depending on vendor terms. However, material financing helps you extend those 30 day terms into 120-days. A material financing partner will pay your suppliers in cash, upfront, and then extend you longer terms to align with payment cycles. These financing partners also report back to the credit bureaus, unlike suppliers, so they help you build up your business credit as another benefit. Usually, material financing partners can offer significantly larger credit lines than a supplier can, so you can take on larger projects without the fear of getting cut off from your terms, leaving you without material.

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Business Lines of Credit for General Contractors

Business lines of credit offer flexibility that makes them very useful for a general contractor’s working capital needs. A bank or other lender extends a line of credit which you can draw from up to a certain amount. It’s kind of like a credit card, only with a much bigger credit limit. You pay back the amount that you draw, with interest; as you repay what you borrowed, that amount becomes available to borrow again. As you’re growing, it may be tough to find a bank that will offer a line of credit large enough to finance your needs. Using a financing partner that reports to the bureaus, you can build your business credit to work your way up to a larger line of credit.

Factoring for General Contractors

Are you struggling with late-paying customers? Drawn-out payments are common in the commercial contracting construction industry. Factoring (also called invoice factoring) can help you get past this problem. You sell your receivables to a factoring company in return for immediate cash up to a percentage of the invoices’ value, generally 70% to 80%. The factor takes over collecting on the receivables. If they collect, you’ll receive more of the money, minus the factoring fee. Be weary though, as this type of financing sometimes comes with a negative perception, and also very high fees.

General Contractors Equipment Financing

Need equipment for a project? Equipment financing can put you in the seat of that brand new backhoe. Equipment financing loans are available from banks, specialized construction equipment financing companies, or directly from the equipment dealer. Like an auto loan, the equipment itself serves as collateral for the loan. You get access to the latest and greatest equipment without having to pay for it upfront.

Bank and SBA Loans for General Contractors

Bank loans generally offer the lowest interest rates of any type of contractor financing. The trade-off, however, is that they’re usually the most difficult to get. SBA loans are bank loans that are backed by the Small Business Administration. The SBA guarantees it will pay back most of the loan if you default. The guarantee can make banks more amenable to lending to general contractors, but it also means more hoops to jump through before you are approved.

Commercial construction loans through a bank require providing lots of documentation, including tax returns, financial statements and construction plans. Your personal and business credit score will be checked and you’ll need to make a down payment, typically 10% to 30% of the amount borrowed. When you’re worried about cash flow and need money to move ahead on a construction project quickly, these loans don’t fit the bill. But if you can qualify for this type of financing, the low interest rate will benefit you.

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Business Credit Cards for General Contractors

Using a business credit card to purchase materials can help you bridge the gap when your cash flow is struggling. However, credit cards have some downsides. They typically have high interest rates compared to other forms of financing. They won’t work for every expense (you can’t put payroll on a credit card, for instance). Your credit limit may be too low to cover the materials and equipment you need.

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