Top Business Financing Options For Contractors

As a professional contractor, it takes the right resources to complete each job. From equipment to employees and insurance, careful planning, preparation, and the right tools for the job are always required. No matter what type of contractor you are, you have one thing in common with other contractors and business owners: the need for capital to operate and expand your business.

While it’s great to be able to pull the funds you need from your own bank account to cover your expenses, this isn’t always a possibility. For times when you need financial help, consider a business loan for contractors. A business loan can be used to expand your business, fund daily operating expenses, or fill in gaps during seasonal lulls.

Before you start your loan application, first understand the types of loans available to you and which is best for boosting your business. Whether you’re an electrician, carpenter, plumber, painter, or another type of contractor, you have financing options.

Read on to learn more about business loans for contractors, choosing your lender, and how to apply for the financing you need.

Financing Need Best Loan Type Recommended Lender
Purchasing Equipment Equipment Loan Lendio
Supplies & Inventory Line of Credit Kabbage
Working Capital SBA Loan SmartBiz
Marketing & Advertising Short-Term Loan LoanBuilder
Emergency Funds Business Credit Card Chase Ink Business Cash
Cash Shortages Invoice Financing BlueVine
Hiring, Training & Payroll Installment Loan OnDeck

Purchasing Equipment

No matter what industry you’re in, as a contractor, heavy equipment is a must for your business. If you specialize in land grading, a skid steer is necessary to complete each job. Maybe you need a work van or truck to move from job to job or even an equipment trailer to transport your equipment around town. Regardless of what type of equipment you need for your projects, one thing is certain: equipment can be expensive.

Even if your business is successful, tying up tens of thousands – or even hundreds of thousands – of dollars from your own pocket could be financially damaging to your company. Instead of shouldering this financial burden alone, consider applying for an equipment loan.

Equipment Loans

With an equipment loan, the lender provides funding to purchase equipment. You’ll pay just a small down payment — typically 10% to 20% of the purchase price — and can then put the equipment into use immediately. You’ll then repay the loan with interest through regularly scheduled payments that are typically made monthly or weekly.

Equipment loans can be used to purchase all types of equipment, from heavy equipment to vehicles. The equipment purchased with loan proceeds is used as the collateral. Repayment terms, interest rates, and down payment requirements are determined by the lender and are typically based on creditworthiness, annual revenue, and other factors.

Recommended Option: Lendio

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When you’re shopping around for business loans, Lendio is an excellent resource. Lendio is a loan aggregator, which means that you’ll connect with multiple lenders with just one application. Once you’ve filled out the application, you’ll receive offers and can easily compare which are the best for your business.

Lendio connects contractors and other business owners with a variety of financial products, including equipment loans. Interest rates start at 7.5%. Borrowers can apply to receive between $5,000 and $5 million. Repayment terms of 1 to 5 years are available. Loan proceeds can be used for the purchase of any type of equipment, including heavy equipment, software, office furniture and fixtures, vehicles, appliances, and more.

To qualify, you must have $50,000 in annual revenue. You must be in business for at least 12 months, and a minimum credit score of 650 is required. If your credit score is lower than 650, you may be matched with a lender if you have solid cash flow and revenue.

Supplies & Inventory

In addition to equipment, supplies and inventory are also important to the operations of your business. No matter what type of supplies you need — lumber, hand tools, paint, ladders — these expenses can pile up quickly.

If you’re in need of inventory and supplies but your cash flow is a little short, you can receive a loan to cover this expense. A financial product that works well for supply and inventory purchases is a line of credit.

Lines Of Credit

A line of credit is a flexible financing option that can be used as needed. When you receive a line of credit, you can make multiple draws up to and including your assigned credit limit. Once a draw is initiated, most lenders transfer funds immediately, which are then available in your business checking account as soon as the next business day.

A line of credit can be used to purchase supplies and inventory and comes in handy when you’re unsure of exactly how much money you need. Interest is only charged on the borrowed amount. As you repay your line of credit, funds become available for you to use again as needed.

Credit score, time in business, and annual revenue requirements vary by lender. Some lenders put more weight on incoming cash flow over personal credit score, making it possible for business owners with credit challenges to receive a loan.

Recommended Option: Kabbage

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Kabbage is a lender that offers lines of credit up to $250,000 to qualified borrowers. Repayments are made on a monthly basis over a period of 6 or 12 months, which is determined by the amount borrowed. Fee rates vary from 1.5% to 10% based on business performance.

One of the benefits of working with Kabbage is access to the Kabbage card. This card gives you instant access to funding. Use your Kabbage card like a credit card for on-the-spot payments without waiting for a transfer. Once you’ve made a purchase, a new loan will be created under your account with the same rates and terms as traditional draws.

To qualify for a Kabbage line of credit, you must have either $50,000 in annual revenue or $4,200 in monthly revenue for the last 3 months. You must be in business for at least 1 year to qualify. During the application process, your business accounts — such as business checking, PayPal, Amazon, and Stripe — are connected to determine your maximum credit limit.

Working Capital

Every business needs working capital — money that’s used to pay day-to-day operating expenses. While your incoming cash flow should cover these regular expenses, it’s not uncommon to come up a little short from time to time. A slow season, unexpected expenses, and other issues could affect your incoming cash flow and your amount of working capital. When you don’t have adequate working capital, operations can slow … or come to a screeching halt.

If you need working capital and you have a solid credit score, one option to consider is a Small Business Administration loan.

SBA Loans

The Small Business Administration, or SBA, helps business owners succeed through its resources and programs, including small business loans. The SBA offers multiple loan options for small business owners. All loans are distributed through SBA-approved lenders known as intermediaries.

Loan Program Description More

7(a) Loans

Small business loans that can be used for many many business purchases, such as working capital, business expansion, and equipment, inventory, and real estate purchasing.

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Microloans

Small loans, with a maximum of $50,000, which can be used for working capital, inventory, equipment, or other business projects.

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CDC/504 Loans

Large loans used to acquire fixed assets such as real estate or equipment. 504 Loans are offered in partnership with Community Development Companies (CDCs) and banks.

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Disaster Loans

Loans used to rebuild or maintain business following a disaster. 

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The 7(a) loan program provides up to $5 million for any business purpose with repayment terms of 10 or 25 years. The Express loan is similar to the 7(a) loan but is available in amounts up to $350,000 and comes with an approval decision guaranteed within 36 hours. The SBA Microloans program provides up to $50,000 for smaller capital needs. There are also financing opportunities for veterans, service members, and businesses operating in underserved areas.

While SBA loans have more stringent borrower requirements than other loans, those who qualify will receive competitive interest rates and terms. Many SBA loans, including the ones previously mentioned, can be used for working capital needs.

Recommended Option: SmartBiz

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SmartBiz makes the SBA loan application process easier than ever. Through this lender, you can apply for loans between $30,000 and $350,000 to use for working capital or debt refinancing.

Interest rates are currently 8% to 9% — the prime rate plus 2.75% to 3.75%. Fees will need to be paid to receive a loan, including a packaging fee, referral fee, and guarantee fee. Specific collateral is not needed but a blanket lien is required.

To qualify for a SmartBiz SBA loan, you must be in business for at least 2 years. A minimum personal credit score of 650 is required. Other credit requirements include no bankruptcies or foreclosures in the last 3 years, no open tax liens, and no outstanding collections. Business owners that have past defaults or delinquencies on government loans are ineligible. You must meet the standards of a small business as defined by the SBA, which limits annual revenues, number of employees, and company net worth. You must also show that you have sufficient cash flow and can afford to pay the loan.

Marketing & Advertising

You can’t grow your contracting business without marketing and advertising. To gain new clients and increase your revenue, a marketing and advertising campaign is a must.

Unfortunately, this comes at a price. Of course, you could rely on free methods to get the word out about your business. However, to efficiently and effectively scale your business, a paid campaign is key. A short-term loan could provide you with the extra funds you need to launch your marketing and advertising campaign.

Short-Term Loans

A short-term loan is a loan for a specific amount of money that is paid back over time. While many short-term loans have repayment terms of 12 months or less, more lenders are loaning money with longer terms up to 3 years.

Short-term loans can be used for any business purpose, including funding a marketing and advertising campaign. Many short-term lenders have fewer requirements and can release funds quickly – sometimes even within 24 hours.

One difference with short-term loans, when compared to other financing options, is that a factor rate is used in place of an interest rate. This factor rate is a multiplier that determines the lender’s fee, which is added to the loan balance.

If you pursue a short-term loan for marketing and advertising, it’s necessary to plan out your campaign. Since your loan will be for a specific amount, you’ll need to know exactly how much you plan to spend. If you’re looking for a more flexible option, consider a line of credit to fund your next campaign.

Recommended Option: LoanBuilder

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LoanBuilder, by PayPal, offers short-term loans for $5,000 to $500,000. Repayment terms are between 13 to 52 weeks. Repayment terms are based on the amount of the loan. A one-time fee of 2.9% to 18.72% of the borrowed amount is added to the loan. A blanket lien is required to receive this loan. Once approved, funds can be transferred to your banking account as soon as the next business day.

To qualify for a LoanBuilder loan, your business must be in operations for at least 9 months. An annual revenue of $42,000 and a personal credit score of at least 550 is required. You can’t have any active bankruptcies in order to qualify. The lender will review your credit history and the health of your business to determine your maximum loan amount and rates.

Emergency Funds

An unexpected expense pops up, and you don’t have the money in your account to cover it. This is a scenario that can be stressful for the most level-headed and prepared business owner.

If you don’t have an emergency fund of your own and shuffling your finances to cover an emergency expense isn’t working out, take control of the situation by applying for a business credit card.

Business Credit Cards

If you’ve ever had a personal credit card, you already know how this works. After approval, the lender gives you a credit card that can be used anywhere credit cards are accepted. Your credit card comes with a credit limit. You can make multiple purchases up to and including this limit.

Each month, you make a payment toward the balance and the interest charged by the lender. As you pay down the balance, funds become available to use again. Interest is charged only on the borrowed portion of funds. A credit card can be used for any business expense, such as purchasing supplies or paying recurring expenses. A credit card is a good choice for emergency expenses because it’s available to use immediately. Once you’re approved by the lender and have received your card, you can use it whenever you want without having to wait.

Interest rates are based on your creditworthiness. Credit cards for fair credit scores are available. If your score is very low, you may qualify for a secured card, which requires a cash deposit. By using and paying your card off responsibly, you can increase your credit limit, improve your credit score, and qualify for additional cards or loans with better rates and terms.

Many credit cards even come with rewards programs, which reward you for using and paying off your card. You’ll rack up points to receive cash back, hotel stays, or other benefits with responsible use of your card.

Recommended Option: Chase Ink Business Cash

Chase Ink Business Cash



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Annual Fee:


$0

 

Purchase APR:


15.24% – 21.24%, Variable

The Chase Ink Business Cash credit card is a popular choice with business owners that have good to excellent personal credit. The Chase Ink Business Cash card comes with an introductory 0% APR for the first 12 months. After the introductory period, rates are 15.24% to 21.24%.

If you spend $3,000 or more within the first 3 months of opening your account, you’ll receive $500 cash back. The rewards continue with 5% cash back on the first $25,000 spent toward internet, cable, phone, and office supply store purchases every year. You’ll receive 2% cash back for the first $25,000 spent at restaurants and gas stations every year, and 1% cash back on every other purchase.

Cash Shortages

From time to time, cash shortages occur in your business. Even when cash flow slows, expenses still need to be paid. Cash flow shortages occur for a number of reasons, from winter slowdowns to slow-paying customers.

If your issue is the latter and you’re waiting to receive payment for completed jobs, cut down your waiting time by applying for invoice financing.

Invoice Financing

Invoice financing is a type of loan that is borrowed against unpaid invoices. There are two types of invoice financing: invoice factoring and invoice discounting.

Invoice Financing Invoice Factoring

Uses invoices as collateral for a line of credit

Sell invoices for immediate cash

You are granted a credit facility based on the value of your unpaid invoices, and can draw from your available funds at any time

Factor gives you an advance when the invoice is sent and sends you the rest once the customer pays (minus a factoring fee)

You are responsible for collecting invoice payments

Factor is responsible for collecting invoice payments

With invoice factoring, you’ll receive a partial payment for your unpaid invoices. Once the lender collects the total invoice amount from your customer, you’ll be paid the remaining amount, minus fees and interest.

With invoice discounting, you’ll receive approximately 90% to 95% of the total invoice. Once you collect full payment from the customer, you’ll repay the lender for the loan, including interest and fees.

Personal credit often doesn’t play a significant role in qualifying for invoice financing. Instead, the quantity and quality of the invoices are most important. That is, are the invoice totals enough to cover fees and interest charged by the lender, and are your customers likely to pay? You also must be a B2B business in order to qualify for invoice financing.

Recommended Option: BlueVine

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BlueVine provides invoice factoring lines up to $5 million. Rates are as low as 0.25% per week, with funding approvals as fast as 24 hours.

With BlueVine’s invoice factoring, you’ll receive 80% to 85% of your invoice total immediately. Once the invoice is paid, you’ll receive the remaining amount after fees have been paid to the lender.

To qualify, you must have a personal credit score of at least 530 and a time in business of at least 3 months. You must also be a B2B business with at least $100,000 in annual revenue.

If you don’t qualify for invoice factoring from BlueVine, the lender also offers lines of credit up to $250,000 with rates starting at 4.8%.

Hiring, Training & Covering Payroll

Your business is growing, and you’re taking on new projects. This is what you’ve worked so hard to achieve, but what happens when you don’t have the manpower to complete all your jobs? The logical answer is to hire and train new employees, but what do you do when you don’t have the funds to bring on new hires?

Whether you’re stalling on hiring and training new employees due to financial issues or you’re struggling to cover your current payroll, an installment loan may be the solution.

Installment Loans

An installment loan is a loan that is paid in regularly scheduled installments. You’ll receive a lump sum of money, which is paid back over time along with interest.

Installment loans provide you with the money you need for any business expense. You’ll have money in your account to pay your expenses, such as covering payroll or hiring new employees, and can repay it through more manageable daily, weekly, or monthly payments. Rates, terms, and borrowing limits vary by lender and are typically based on creditworthiness and your ability to repay the loan.

Recommended Option: OnDeck

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OnDeck offers small business installment loans up to $500,000. Eligible borrowers can apply for short-term loans with repayment terms of 3 to 12 months or long-term options with repayment terms of 15 to 36 months. Daily or weekly repayment plans are available.

Short-term loans have simple interest rates starting at 9%, while long-term loans have annual rates as low as 9.99%. An origination fee between 2.5% and 4% of the total loan amount is required, and fees are reduced for repeat customers. Interest rates are based on business and personal credit scores, as well as the performance of your business.

To qualify, your business must be in operations for at least one year. You also need a personal credit score of at least 500 and $100,000 in annual revenue.

Best Financing Options For Contractor Startups

You have the skills, you have the drive, and you’re ready to start your contracting business. There’s just one problem: you don’t have the money to start your business and traditional lenders aren’t taking you seriously. Before you throw in the towel, know that there are financing options that will help you get your business off the ground.

Startup and new business owners can look into SBA Microloans, which provide up to $50,000 to cover startup expenses. The average loan amount given through this program is $13,000. SBA Microloans are available through SBA-approved nonprofit intermediary lenders.

SBA 504 Loans

Borrowing Amount

$500 – $50,000

Term Lengths

Up to 6 years

Interest Rates

6.5% – 13%

Borrowing Fees

Possible fees from the loan issuer

Personal Guarantee

Guarantee required from anybody who owns at least 20% of the business

Collateral

Collateral normally required, but depends on the lender

Down Payment

  • No down payment for most businesses
  • Possible 20% down payment for startups
  • Possible 10% down payment for business acquisition loan

If you don’t qualify for an SBA loan, you can also apply for microloans through nonprofit organizations and alternative lenders like those below:

Lender Max. Borrowing Amount Rates Req. Credit Score Next Steps

$500,000

2.9% – 18.72% factor rate

550

Apply Now

$250,000

9% – 36% factor rate

500

Apply Now

$500,000

9.4% – 99.7% APR

500

Apply Now

Another option to consider is taking out a personal loan to use for startup expenses. With this strategy, you can receive an affordable loan with favorable terms (if you have a solid credit score) from lenders like these:

Lender Borrowing Amount Term Interest Rate Min. Credit Score Next Steps

$2K – $25K 2 – 4 years 15.49% to 30% 600 Apply Now

$1K – $50K 3 or 5 years 8.16% – 27.99% 620 Apply Now

$2K – $35K 3 or 5 years 6.95% – 35.99% APR 640 Apply Now

lending club logo

$1K – $40K 3 or 5 years 5.32% – 30.99% 640 Compare

Peer-to-peer, or P2P, loans may be another option for funding your new business venture. Crowdfunding and loans from friends and family are additional loan options available to cover startup costs.

What To Consider When Choosing A Lender

5 C's of Credit: What Lenders Look For

Before you begin the application process, you must choose the right lender. The internet gives you access to more lenders than ever. While this gives you more choices, it can also complicate the process of finding the right lender that offers the loan you need.

The goal of your loan is to advance your business. You want to ensure that your return on investment is worth the cost of the loan. You also want to make sure that you work with a lender that provides the best rates and terms for your financial situation.

To narrow down your choices, ask yourself a few key questions. Once you’ve answered these questions, you’ll be one step closer to selecting your lender and applying for your business loan.

Why Do I Need A Loan?

Before you apply for a loan, ask yourself why you need the money. Having a plan for loan proceeds is the first step in responsible borrowing. When you apply for a loan, you’ll need to communicate with your lender how you plan to use the funds.

Knowing how you will use the money will also help you choose a lender. Let’s say you’re seeking a line of credit. A lender that only offers short-term or installment loans won’t fit your needs, so you can scratch this lender off the list and keep shopping.

How Much Money Do I Need?

Calculating how much money you need before applying for a loan is just a financially responsible move. You never want to take money just because it’s offered to you.

For most loans, you need to request a specific amount from your lender during the application process. Before filling out an application, calculate how much money you need. For example, if you’re purchasing supplies or equipment, shop around and gather quotes and bids. While you’re making your calculations, also figure out how big of a loan you can afford.

By determining how much money you need, you’ll be able to immediately eliminate multiple lenders. If you need $150,000 but a lender has maximum borrowing limits of $100,000, you can simply move on to the next financing option.

Am I Qualified?

Every lender will review your personal information and documentation to determine if you are qualified to receive a loan. Applying to a lender with requirements that you simply don’t meet is a waste of time … and creates an unnecessary inquiry on your credit report.

For every lender you’re considering, evaluate all requirements. Is your personal credit score high enough? How about revenue? Does the lender have a time in business requirement, and if so, do you meet it? Can you provide all documentation that is required by the lender? Pull your free credit score, evaluate your finances, and search for a lender based on this information.

If you don’t qualify with one lender — or several — don’t worry. There are plenty of other options available for your specific financial situation.

Do The Rates & Terms Meet My Needs?

Taking out a loan that you can’t afford is a recipe for disaster. While the loan may be helpful over the short-term, the long-term effects can be damaging. This is why you need to make sure that the rates and terms best fit your needs.

Compare interest rates and repayment terms to make sure you’re receiving the most affordable loan for your situation. For example, a short-term loan that’s funded quickly may seem like a great option when you need quick cash. However, a loan with a high factor rate, short repayment terms, and weekly payments may quickly become too much for your business to handle. Be smart, be responsible, and shop around before signing on the dotted line.

What You Need To Apply For Contractor Business Loans

The process for applying for a contractor business loan differs based on your chosen loan product and the lender you select. For some loans — such as lines of credit and business credit cards – the application process is quick and easy, and you can be approved minutes after applying. For other financing options – such as SBA loans – the application, underwriting, and approval process may take several weeks or longer.

During the application process, you’ll submit information and documentation to the lender. At the most basic level, you’ll provide basic information including your name, business name, address, telephone number, email address, social security number, and federal tax ID number.

While this may be sufficient for some loans, other loans require more documentation. These requirements include:

  • Personal & Business Credit Reports/Scores
  • Personal & Business Bank Statements
  • Income Statements
  • Profit & Loss Statements
  • Balance Sheets
  • Business Licenses
  • Business Owner Resumes
  • Business Plan

Requirements vary by lender. During the underwriting process, your lender may require additional information. Make sure to make yourself available through email or over the phone to provide additional details and documentation as needed to expedite your loan request.

Final Thoughts

Being a contractor certainly has its advantages and can be a profitable venture. However, running your own business doesn’t come without its challenges — especially when it comes to finances. No matter what scenario you face, knowing your loan options, taking the time to find a lender that meets your needs, and borrowing responsibly can help you clear these financial hurdles.

The post Top Business Financing Options For Contractors appeared first on Merchant Maverick.

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