Coffee Break

Obtaining a Loan for Construction Companies: 5 Ways to Prepare

Cash flow is a common challenge construction businesses face, especially smaller scaled companies with 20 or fewer people running operations. These business owners have to make sure their income and expenses are aligned, especially when financing ongoing projects. If you’ve started your own construction company, you can apply for loans dedicated to construction businesses to help you finance your operational expenses.

Loans for construction companies can help your business keep up with day-to-day expenses such as training laborers, producing marketing materials, and replacing damaged materials. They can also help to supplement certain project costs or provide a financial cushion for your company to fall back on in the event of an emergency.

In this article, we’ll outline five areas to consider before applying for a construction loan so you can properly prepare.

  1. Create a plan for how you’ll use the loan

Planning is crucial for any loan application process. You wouldn’t start a construction job without a thorough plan in place, and the same goes for choosing a loan. You need to think about your business’ specific needs – the amount of money needed, what it’s needed for, the timeframe in which it’s needed, etc. – so you can select the loan that best meets those needs. The more specific you can be, the more prepared you’ll be to not only obtain the loan, but put it to use.

  1. Understand your balance sheets before applying

Before you apply for any loans, you need to understand your financial records. This includes your company’s cash flow, any existing lines of credit, and projections. Familiarizing yourself with your books will help you determine what type of loan you need, and can afford to pay back, as well as where you need the funding most.

Knowing your balance sheets will also help you answer any questions asked by lenders. Most lending companies or institutions have requirements you must meet before they will grant you an application for the construction loan. If you’re unable to show that you meet them, you won’t be able to apply.

  1. Determine when hard and soft expenses are going to hit

Your company’s expenses are made up of hard costs and soft costs. “Hard costs” are those related to physical construction expenses such as materials and labor. “Soft costs” are those related to project maintenance such as permits, taxes, loans, and insurance. Familiarizing yourself with the different areas of your business that fall into each category will help you to create project budgets. The better you are at creating these estimated budgets, the easier it will be for you to determine if you need a loan or not (and if so, where the funds are needed).

  1. Have a creative approach to your cash flow management

You should create a system that can help you monitor and manage your income and expenses. How you approach this may vary depending on the projects your company plans to accept and your arrangement with suppliers. It may also depend on the credit limit you have. After all, you need to pay your loans on time to have a healthy credit history.

A creative approach to your cash flow management is necessary. See which suppliers, if any, accept advance payments or installments, and check which types of construction loans best apply to your management system.

  1. Always ask for a deposit before starting a project

Make it a priority to always ask your clients for a deposit before starting a project. No matter how small your company is, you’re always entitled to ask for a deposit before you begin work. Keep in mind, however, that the deposit may vary depending on the state law where the construction is to take place.

A deposit is crucial in managing your cash flow during the earlier phases of the project. You will use this to pay any expenses necessary to start the construction. It will also help you forecast better if there is a need to apply for a loan.

Loans for construction companies can help you when a deposit is insufficient to continue the construction. Construction projects have deadlines to meet, too. The loan will help you continue the project even if your client’s payment delays.

Final thoughts:

Loans are an excellent way to finance your construction projects or maintain steady cash flow for your company. There are several types of construction loans so it’s important to do your research before settling on which one you’ll apply for. Planning your projects, familiarizing yourself with balances and expenses, and asking for the right deposit will help you determine how much you need to borrow, and which area of the project you need to dedicate the funds to.