What is a Construction Line of Credit? How does it work?

The most flexible financing option for entrepreneurs is a construction line of credit. Contrary to traditional loans, which require you to repay a lump sum over a period of time, a construction line of credit allows you to draw funds from your credit card whenever you need them and then pay them back according your schedule. It basically provides short-term capital access on an as-needed basis to pay for almost all business expenses .

Although business lines of credit can be used in the same way as business credit cards, you cannot draw cash from a business card. Both of these resources increase your purchasing power and streamline your cash flow greatly, so it’s a smart idea to explore both these options over the course of your business’s life. Many credit lines are also “revolving,” meaning you can borrow the same funds again after you have paid off your current balance. This schedule allows you always to have cash available at a moment’s notice, which is essential for any construction company.

How can I use a Construction Line of Credit?

Typically, entrepreneurs will use lines of credit to pay expenses and keep their eyes on the bigger picture. Lines of credit are crucial for construction companies to navigate slow seasons and cover up-front costs. If you are in the middle of a slow season and don’t have enough capital, your credit line can be leveraged to buy the supplies and materials you need to get the ball rolling again.

A construction line of credit can be used for any type of business expense. Here are some examples:

• Payroll
• Inventory
• Supplies up-front
• Rent
• Utilities
• Maintenance and repairs of vehicles
• Marketing initiatives

It is easy to get distracted by the higher purchasing power. However, it is important to think about how you will repay the borrowed amount before drawing funds from your line. You could find yourself without the funds you need to finish your project and pay your bills if you overburden your construction credit line. Your repayments will be made even more difficult by the fact that you’ll have to pay a lot of interest.

Construction Line of Credit Benefits

A line of credit can be a huge benefit to construction companies. These are just a few benefits of a credit line for construction:

• Cover expenses during construction delays
• Working capital available on-demand
• Cash flow management during slow seasons
• Enhanced Forecasting
• Capability to seize opportunities
• Increased purchasing power and negotiation with suppliers
• Easier financial risk management
• Additional crew members can be hired
• Buy the equipment you need
• Maintain/repair equipment quickly

Imagine that an equipment supplier offers you a substantial discount on an item you need to submit for higher revenue contracts. You might be unable to pay for the purchase or manage your expenses until your next work season. This could make it difficult to take advantage of the offer. This is a limitless process that will only work until your competition outperforms you. However, if you have a construction credit line, you can benefit from the discount and to cover your expenses.

A line of credit can help with any purchase that has a price. It can be difficult to manage cash flow in a construction company, especially when you consider the seasonality of their work. A line of credit will give you an advantage in nearly every way. You have the ability to control your expenses and take advantage of new opportunities.

How do you qualify for a Construction Line of Credit?

Although you can get a line of credit for construction from many lenders, the requirements will vary depending upon the company you are dealing with. While some lenders may require higher credit scores than others, others will place more importance on your annual income than your business activities. These are the minimum requirements of National Business Capital for a construction credit line:

The maximum credit limit that you are seeking will also affect the qualifications. The qualifications will not be excessive if you don’t require a higher limit. However, if you do need to have a higher limit you can expect to provide detailed financial information.

Construction Line of Credit Alternatives

While construction lines of credit can be a great way to grow your business they are not the only funding option for entrepreneurs in this industry. These are some alternatives to construction credit that may help you realize your full potential.

Construction Term loans

Term Loans are the most common type of financing available to businesses. This is a lump sum payment you will repay over the term. The principal and interest will be paid off, so the amount you end up paying will exceed what you were given at the start of your term. After you have repaid the entire amount, there will be no debt attached.

Many construction term loans are used to support large contracts or the purchase of costly equipment . You can either get financing before your contract begins, and then use the profits for repayment. Or, you could obtain a term loan mid-term to meet deadlines .

Construction Equipment Financing

Heavy equipment is essential for the construction industry. However, entrepreneurs often cannot afford to pay for it. A single excavator, for example, can run anywhere from $100,000 to $500,000. Construction equipment financing is a great way to reduce the large purchase into smaller monthly payments. You may be able to use the asset that you are looking to buy as collateral to the financing.

Many entrepreneurs are discouraged from financing construction equipment with high-interest rates. The cost of financing is less important if the equipment will produce huge results for your business.

Construction Business Advance

The business advance is a way to exchange your future revenues for cash in the near term. This is essentially an advance on future sales. However, the lender’s fees will prevent you from obtaining the full amount. You can generally expect to secure as much as 85% from your future sales.

This type of financing is very common in the construction industry. Contracts are usually paid after they’re finished, so there isn’t much available for working capital. This can be avoided by obtaining a business advance. To ensure that you can finish your job within the deadline, you can obtain the funds you will receive at the conclusion of your contract .

Construction Accounts Receivable Financing

Late payments can make it difficult to start new jobs. However, construction accounts receivable funding will allow you to convert your late payments into cash. The lender’s fee is similar to a business loan. You won’t be eligible for the full amount of your outstanding payments. It’s still a great choice if you have a problem with late payments.

While all of these options will help you realize your full potential, deciding which one is best for you can be a difficult task. Before making a decision, you’ll need to evaluate your financial situation and business model. It’s difficult to know what the right decision is. This is why many entrepreneurs partner with National Business Capital to let our Business Finance Advisors handle all the hard work.

Make it easier to find a construction line of credit with National Business Capital

Entrepreneurs like you don’t have much time. You might find it difficult to compare all the options when you are busy managing your day-to-day operations and keeping the ship in order. This is not to mention the effort required to fill out and submit applications to multiple lenders. It’s a lengthy part of an already complicated process. You have to find a better way of securing the funds you need in order to grow.

There are. National Business Capital, the most trusted SMB FinTech marketplace can help you simplify your search for a building line of credit and other financing options. Instead of applying to each lender individually and waiting for their decisions, you can complete one application with us and simultaneously apply to 75+ lenders . Our Business Finance Advisors will reach out to you and gather as much information about your company and personal circumstances as possible in order to help you find the right lender that meets your needs.

Through 25,000+ transactions we have secured $2B for our clients. This makes us uniquely qualified to help you achieve your full potential. We have experience in almost all industries so you can be sure that we understand your needs. We are confident that you will be convinced. Take a look at some 2,000+ 5-star reviews on trustpilot.

We are here to support you. To get started, complete our digital app now.

FAQs

Why would a construction company need a line of credit?

Credit lines provide continuous access to capital for virtually any purpose. The credit limit you can borrow is your credit limit. Interest only applies to the amount that you have drawn. Lines of credit can be used by construction companies to pay for inventory, payroll, rent, and maintenance costs.

A line of credit will allow you to stop worrying about your finances and instead focus on the bigger picture.

What is the difference between a construction loan and a line of credit?

A construction loan is often paid in one lump sum, while a line credit allows you to have consistent access to capital for the duration of your term. You will need additional financing if you borrow money for construction and then end up needing it again. However, lines of credit allow you to access funds at any time you need them, provided you don’t exceed your limit.

How do you get a construction loan?

Online lenders, credit unions and banks can all help you get a loan or line of credit for construction. Online lenders have lower interest rates and strict eligibility requirements than banks and credit unions. Marketplaces offer both traditional and online lenders. This allows you to get multiple offers from one application.