Construction is a continually growing industry, employing an estimated 7.1% of working Canadians. Of the major businesses in Canada, construction makes up approximately six percent of our GDP, totalling over 73 billion dollars. With our access to natural resources and construction supplies, as well as the large landmass and increasing urbanization, this lucrative industry continues to draw in workers.
Of course, in order to open a business, or grow your existing company, you will need capital. Whether the funds will be allocated toward marketing, inventory, or skilled workers, accessing a loan is often the step that sets a business on the path to success. In order to make the best financial decisions, it’s important to gather all the information you can about business loans. By understanding how you can use a loan to foster your business interests, you can make the best decisions for your construction company.
How a Business Loan Can Help Your Construction Business
A business loan for your construction company can give you the liquid funds needed to complete your contracting project. While there are countless different approaches to construction loans. A few tried and true methods include:
A common use of construction loans is accessing inventory. Construction involves a lot of supplies, all of which come with a hefty price tag. Loan amounts can be applied to purchase orders, ranging from two-by-fours to drywall, and everything in between.
When you get a contract to construct a new building or renovate an older one, there is often a lot of paperwork involved in the process. Legal fees are another expense that can be covered by a business loan. Especially if the lawyer is required to complete the contract, it is a wise place to allocate the funds.
In terms of both manpower and organization software, a construction loan can give you the funds needed to conduct your business prudently. You can use the amount to invest in programs that facilitate the business side of your construction company. The amount can also be put toward payroll.
Another good use of construction loan funds is towards getting skilled labour. Whether subcontracting or hiring professionals directly, choosing those with experience and relevant credentials is a worthy investment. In fact, for certain situations like gasfitting, it is necessary to use an accredited professional. Even for tasks that aren’t regulated, like flooring or drywall, you can save a lot of time by choosing skilled workers. Since it is more expensive to enlist these professionals, paying for skilled labour is a common application for construction loans.
Construction loans are offered on a short-term basis, typically having a year-long term. The funds are allocated to a specific project under contract. The loan is not meant to fund the entire project, rather it is there to give you supplemental funding to put towards the building cost. The loan is used to either fund a new build or to provide money for renovation projects.
Depending on the construction company and the nature of the project, the loan may be classified as a high-risk project. This means that it may be more challenging to get a loan through a major institution; and, when you do, it could come at a higher interest rate.
How Does a Construction Business Loan Work?
Once the construction on the project is complete, there are a couple of routes the borrower can take to repay the amount.
The first is to leverage the construction loan into a construction mortgage, a more permanent loan arrangement. In this case, the new build’s mortgage will be held by a financial institution, much like a traditional mortgage.
Another way you can go is to take out a second loan, often referred to as an end loan. Basically, this is a construction loan with a longer-term, where the funds are used to pay off the existing loan. The remainder can be used towards future builds.
In most cases, there are specific repayment requirements for construction loans. In order to use the loan properly, it is important to familiarize yourself with these rules. Often, the loan needs to be paid in its entirety by the time construction is complete. In other situations, you only need to pay interest while you are building. It depends entirely on the lender.
Where Can You Get a Loans For Your Construction Business
There are several places you can approach to get a construction business loan, each with unique advantages and disadvantages. By gaining an understanding of each potential lender, you can make the best decision for your business. Lenders include:
Perhaps the most common approach, major banks and financial institutions have strict lending standards. As a result, it can be difficult for less established businesses to access funding, particularly if the owner has poor credit or the construction company is new. However, if you can access a loan through a major bank, you can get competitive rates that result in less spending over the term of the loan.
Another option for construction loans is to pursue an alternative lender. These businesses have more flexible lending standards, though the loans come at a higher rate of interest. If time is of the essence, these can be very helpful since the loan application process is typically online and can be completed quickly.
The Government of Canada offers an arrangement called the Canada Small Business Financing Program (CSBFP). Designed to make loans more readily available to small Canadian businesses, this method can often afford competitive rates. It is also easier to get accepted through this program, especially if you are not yet fully established as a company.
Best Business Loan Providers For The Construction Industry
Things to Watch Out For When Applying For a Business Loan
There are a few things to keep an eye on when you go to apply for a construction business loan, especially if you are new to the field. While, ultimately, there will be a way to access funding, construction workers face many challenges when accessing loans. These issues include:
Being a term contractor: Because these workers don’t have steady, year-round income, they can be construed as a higher-risk investment. Since there isn’t ongoing income, the ability to repay the loan gets called into question. As a result, it can be harder to access funding.
Young business: If the business hasn’t been in operation for at least a year, there isn’t yet proof of concept. Especially given the failure rate of businesses in their first year, it can make you a higher-risk borrower. This can act as a barrier to funding.
Poor credit: Should the business owner have poor credit, it makes you a less desirable borrower. Because there isn’t a proven history of the borrower repaying loan amounts, not only will it be harder to get a loan, but the loan will have a higher interest rate.
If you are facing issues with accessing funding, a good approach to consider is putting down personal collateral. Depending on the size of the loan you’re seeking, the size of the collateral will vary. It can range from a lien on your home to your vehicle. This collateral secures the loan, thereby making you a safer party to whom to lend.
When you use an alternative construction loan, there are several different loan types, each geared towards a different business situation. Options include:
This kind of loan suits newer businesses. The lender provides you with all the funds you need to buy equipment, where that same equipment becomes the collateral to secure the loan. With these loans, you don’t need to worry about putting personal collateral down. Plus, since the loans can be issued to those with younger companies, you can use the loan to grow your business.
Also referred to as accounts receivable loans, this is where a business gets a financial advance where unpaid invoices are the collateral. Often, you can get as much as 85% of the value of your unpaid invoices. This means that, once the invoices are paid, you’ll receive the agreed-upon balance minus fees. Invoice factoring is best suited for companies that have existing contracts but need fluid funds to address immediate business needs.
Line of Credit
Suited to growing companies, a line of credit is where a lender will give you access to a set amount of funds. You can use this money towards any business purpose and can access the funds at any point in time. Interest is charged on the amount you spend, rather than the total. Depending on your repute and credit, the line of credit can be secured or unsecured.
What documents do I need to apply for a business loan for my construction company?
As with any loan, there are several documents required when you apply for your loan. These include:
Bank statements: Bring at least a year’s worth of business bank statements to prove your solvency.
Tax returns: This highlights how long you’ve been in business and prove your annual worth.
Current contracts: Your existing contracts prove that you have cash flow; that your business is active and will be profitable.
Business plan: In order to get a loan, the lender will want to see your business plan, including how you plan to use the loaned funds.
How do I increase my chances of getting a business loan?
Especially if you are struggling with accessing a loan, it is important to take steps to make yourself a more desirable borrower. You can:
Increase your credit score: Whether you need to access an equipment loan or debt consolidation loan, taking steps to improve your credit is a simple and proven way to make lenders more inclined to give you a loan.
Provide collateral: If you require the loan more immediately and don’t have the time to improve your credit, you can put collateral down. Potential options include real property and equipment.
Use an online loan broker to get quotes: Understanding what to expect, and the loan terms and amounts for which you qualify, is a critical step in loans research. Deal with an online broker to determine what kinds of loans you can access and use this information to make a plan.
What costs are involved with using an equipment loan?
The cost of equipment loans varies based on the lender, though there are some standard fees you can expect. These include interest, a standard with any loan. Keep in mind that interest rates vary between lenders and you can save a lot of money by finding a more competitive interest rate. Additionally, there are administrative and origination fees associated with opening the account. Other costs include late and early repayment fees. Be sure that you are completely aware of any monthly and yearly costs associated with your loan.
Construction continues to be a major industry in Canada, in terms of both new developments and renovations. As a result, there are many loan options available to you which will enable your business to grow and thrive. So long as you do your research, have a set plan of action, and seize good opportunities when they arise, you can use the loan to ensure a successful business both in the present and the future.
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