Navigating Construction Financing: A Guide to Loans, Grants, and Other Funding Options

Every business owner has a love-hate relationship with money: we love to make it and hate to see it go.

Regardless of whether you are a contractor, a subcontractor, or a developer within the construction business, you need to be aware of all the financing options available to help you with the funds you need to pay for materials, equipment, labor, and other expenses.

However, getting paid for your work can take a long time, especially if you have to deal with delayed payments, retainage, or disputes. That’s why you need to know how to navigate the world of construction financing and find the best funding options for your needs and goals.

And, that’s why we’re here, to bring you this guide to all things loans, grants, and funding.

How to Get Financing for Construction Companies

Construction financing is an umbrella term that covers the various forms of debt capital that help builders improve their cash flow by giving them access to funds or allowing them to defer payment for expenses.

In other words, it refers to the variety of options available to contractors, suppliers, and other construction businesses to access capital when they need it.

Some of these options include:

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Small Business Association (SBA) loans: A 504 SBA loan is one that comes from the US government and a private lender with an aim to help small businesses buy or improve major assets. It has a low-interest rate and longer repayment terms, making it an attractive option for those who meet the criteria.
Home improvement financing: These loans work by allowing homeowners to borrow money for renovation or repair. It can be offered by contractors, banks, credit unions, or online lenders.
Trade credit: In the simplest terms, trade credit is a type of financing that allows contractors or suppliers to purchase goods or services from another business on credit, without paying upfront. It can be offered by manufacturers, distributors, or wholesalers. It can come in the form of an invoice, a bill of exchange, or a promissory note.
Line of credit: This is a type of financing that allows contractors or developers to borrow money up to a certain limit from a lender, without having to apply for a new loan each time. It can be offered by banks, credit unions, or online lenders. It can come in the form of a revolving credit or a term loan.
Project cost financing: This refers to the funding of long-term projects, which is then paid back gradually from the cash flow which the project generates.
Business credit card: The most well-known type of funding, a business credit card allows business owners and contractors to pay for expenses using a credit card. Though this can come with some benefits depending on the rewards a card holds.
Invoice factoring: This is a type of financing that allows contractors or subcontractors to sell their unpaid invoices to a third-party company (called a factor) at a discount. The factor then collects the full payment from the customer and pays the contractor the remaining balance minus a fee.
Equipment financing: In the construction business, equipment can be of the highest cost. Equipment financing is a type of funding that helps contractors or developers in purchasing or leasing equipment for their projects.

Best types of financing for construction companies

Like with most things to do with business, there’s no one-size-fits-all approach to financing. Instead, you need to ask yourself the right questions which help guide you towards the best type of financing for your construction company.

Examples of these include:

Are you a start-up, an established business, or an expanding business? Different types of financing may suit different stages of your business growth and development.
Are you working on a residential, commercial, or industrial project? Is it a small-scale or large-scale project? Different types of financing may suit different types of projects and their requirements.
How profitable is your project in terms of revenue potential, cost efficiency, and cash flow generation? Different types of financing may suit different levels of risk and return.

Based on the factors described above, we’ve provided below some examples of the best types of financing for construction companies in different situations:

Start-up construction company

Constructing your own start-up is nothing short of exciting. But, if you have limited capital and experience, then you may want to consider the following finance options:

Home improvement financing: This can help you attract more customers who want to finance their home renovation or repair projects through you. You can offer them competitive rates and terms and increase your sales volume and cash flow.
Trade credit: Why not buy the materials you need without having to deal with upfront costs? With trade credit, you can negotiate favorable terms and conditions and improve your working capital and liquidity.
Business credit card: A must-have for all new business owners that can help you pay for small expenses such as fuel, tools, or supplies. You can take advantage of the features and benefits of the card and build your credit history and score, and even bag yourself some air miles (depending on the provider).

Established construction company

If you’ve been in the business for some time and have established a great track record but need a little financial pick-me-up, then the following financing options may be best for you:

First off, you can try a line of credit. This can help you access funds quickly and conveniently whenever you need them, and you can use it for various purposes such as meeting payroll, covering overheads, or taking on new projects.
If you’re focusing on specific, longer-term projects, then project cost financing may be your best fit. This can help you fund the cost of a specific project that you have secured or are bidding for.
Invoice factoring can help you improve your cash flow by getting paid faster for your completed or ongoing work, allowing you to bridge the gap between invoicing and payment and avoid cash flow problems.

Expanding construction company

When your construction company has reached the point of expansion, you can give yourself a pat on the back! What you can also give yourself, however, is a respite from the financial stress of expansion by applying for one of the below types of funding:

Equipment financing: Whether you want to upgrade your technology, increase your productivity, or diversify your services, equipment financing is here for you.
Invoice factoring: If you’re looking to enter new markets or acquire new customers, then invoice factoring can help you acquire the finances you need without increasing your risk exposure.
Grants: Certain projects are viable for grants, a type of fund that can help you obtain free money from various sources such as government agencies, foundations, or corporations.

However, if, after answering the necessary questions and reading the information above you’re still unsure as to what the best financing option is for your construction business, then why not get in touch with us?

Grants for construction companies

Grants are a competitive type of financing that does not have to be repaid. They are usually offered by government agencies, foundations, or corporations to support specific causes, initiatives, or sectors.

To get a grant, you need to fill out an application form and meet industry regulations. Some examples of grants for construction companies are:

Cancer Construction Grant: This type of grant provides funding to your construction business if it is working on building or renovating cancer research facilities.
Community Facilities Grant: A form of funding which supports small construction businesses that are involved with building or renovating buildings that aid the community, such as a community hall or sports facility.

Other types of financing to consider

Alas, there’s more.

Besides loans, grants, and other funding options mentioned above, there are some other types of financing that construction companies may want to consider:

Equity financing: You can sell shares of your business to investors to raise your capital. This can give you a lot of money without adding debt or hurting your cash flow, but you also lose some ownership and earnings of your business.
Mezzanine financing: Private equity firms or institutional investors may offer mezzanine financing to businesses that need additional capital for expansion or acquisition. This type of financing provides you with subordinated debt that has higher interest rates than senior debt but lower than equity. It also gives your lenders the option to convert their debt into equity in case of default or exit.
Joint venture financing: If you have a rather large project to work on, you can partner with another business to spread the toll of the expenses. However, this does mean that business decisions must be made collaboratively, and profits would be split.

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Get the help of an accountant from the Atlas Accounting Group

As you can see, there are many types of financing available for construction companies, each with its own advantages and disadvantages.

Choosing the best one for your situation can be profoundly difficult, particularly when your situation doesn’t quite follow textbook standards.

If you need some help deciding on the best financing option for your construction business, then check out our talented accountants here at then Atlas Accounting Group.

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