Finding the right construction contractor financing isn’t always easy. There are many types of construction financing, and each one shines in different ways. This page will walk you through some of the most common contractor financing programs and when each works best to streamline your search.
Why Specialized Financing Matters in Construction
Construction financing can be broken up into two main categories:
- Construction business financing: funding for the construction company itself, including real estate, equipment, and growth-related expenses.
- Subcontractor financing: construction contractor financing is designed to cover the expenses of a project that’s in progress, often secured by general contractors and then disbursed to subcontractors.
While many construction finance companies provide funding in both scenarios, project-related construction finance issues can be more difficult to solve due to the industry’s unique challenges.
The General Contractor and Subcontractor Relationship
General contractors have many responsibilities, including communicating with the property owners, managing pay and cash flow, ensuring all legal requirements are met, negotiating deals, assessing project plans, and overseeing labor. For the most part, however, they don’t directly complete the work. They turn to their network of subcontractors who are experts in specific fields to address specific tasks within each project.
Subcontractors don’t usually communicate with the property owners. Instead, they communicate with the general contractor and report directly to them. The scope of a subcontractor’s duties is much more limited than a general contractor’s. They provide the contractor with estimates or bids, complete the work to the contractor’s expectations, and report any concerns to the contractor.
Unique Challenges in Construction Financing
Finance for contractors is unique. General contractors receive payment from the property owner. Each project and contract are distinct. However, payments are usually only made after the project has been successfully completed or as milestones are met. That means general contractors may not receive a payment until a month or more after work is complete. Subcontractors, therefore, can wait one or two months for payment under ordinary circumstances.
Each subcontractor is responsible for covering their own expenses, such as materials and labor, during this period. It’s a heavy burden to bear, meaning subcontractors often need cash much sooner than the traditional payment schedule allows.
Most construction contract financing options require collateral, which means a lien is placed when a loan is provided. Liens can stop a project’s progress entirely, so subcontractors often cannot secure funding independently.
This puts the ball back in the general contractor’s court. If a general contractor wants to maintain strong relationships with talented and trustworthy subcontractors, they’ll find a way to get subcontractors paid sooner. Some pay their subcontractors out of their own pocket. Because that’s not always feasible, they also leverage commercial contractor financing to obtain capital and pay subcontractors.
The best contractor financing companies support the needs of general contractors and subcontractors that specialize in:
- Carpentry
- Concrete
- Demolition
- Drywall
- Electrical
- Excavation
- Fire alarm and sprinkler systems
- Framing
- HVAC
- Windows and doors
- Landscaping
- Masonry, stonework, tile setting, and plastering
- Painting and wallpaper
- Plumbing
- Roofing, siding, and sheet metal
- And more
Exploring Contractor Financing Options: A Closer Look at Loans, Lines of Credit, and More
Understanding the nuances of contractor financing is essential for every construction business. From contractor loans to construction loans, the type of financing a contractor chooses can significantly impact cash flow and the overall success of a project. Lenders, including banks, credit unions, and specialized financial institutions, offer various financing options tailored to meet the unique needs of construction companies. These options range from traditional term loans and short-term loans to more flexible lines of credit and equipment financing programs. Balancing the immediate upfront costs with repayment terms is crucial for a general contractor. Whether it’s handling payments on a construction project or ensuring smooth cash flow during gaps between projects, the right financing solution, like an SBA-approved loan or a construction-specific line of credit, can be a game changer.
During the application process, contractors must consider factors such as loan amount, interest rates, repayment terms, and collateral requirements. Additionally, many contractors opt for construction financing options that provide the flexibility to grow their business without the constraints of traditional mortgage or loan structures. With the rise of new financing programs, construction companies now have more opportunities than ever to find the right fit for their projects, whether that involves a direct loan for material purchase or a factoring company to bridge cash flow gaps. Ultimately, selecting the right type of financing may help contractors manage their business credit and credit score and enable them to take on more projects and navigate the complexities of the construction industry more effectively
Construction Contractor Financing Solutions
There are many construction contractor financing options. However, some work better to fund business needs and others to finance construction projects. We’ll explore when some of the most common contractor financial services work best below.
Credit Cards
Credit cards can sometimes fit into a construction project finance plan. However, the typical business credit card limit is just $50,000, per Nasdaq. That means they may be ideal for a general contractor who wants to fund the cost of supplies for a subcontractor rather than as general-purpose financing for contractors.
Bank Loan
Bank loans are a common form of construction company financing. Usually drawn up as short-term loans, they’re more versatile than credit cards, and the cash can be disbursed to subcontractors. However, most business loans for contractors have rigid qualifications for approval. For instance, you may be expected to have a high credit score and be in business for a certain period. General contractors who don’t meet the requirements or want better terms can sometimes obtain asset-based loans instead. This type of funding leverages an asset, such as real estate, as collateral on the loan.
Lines of Credit
Construction financing companies sometimes offer general contractors a line of credit (LOC). It works similarly to a credit card, but the limit is usually higher. For instance, a typical LOC limit is $100,000, with some climbing as high as $250,000, Bank of America reports.
This form of construction funding is quite versatile. A general contractor can draw from the available funds and pay subcontractors, then pay the balance back when the project pays out. This cycle can repeat itself endlessly without qualifying for a new loan each time.
However, the qualification process is much like getting approved for a loan, and collateral is often required. It can be challenging for contractors to qualify, especially if they don’t have strong credit or haven’t been in business long.
Trade Credits
Trade credit is a common form of financing for construction projects, but the benefit to subcontractors is limited. With trade credit, you simply negotiate invoicing terms with your suppliers. Net 30 terms, for example, mean you have 30 days to pay the supplier after materials are delivered.
Sometimes, seasoned subcontractors can negotiate their own terms with suppliers. Those not bringing in at least a million dollars per year may have better luck negotiating these terms if the general contractor helps lock in a deal.
Construction Invoice Factoring
When traditional forms of general contractor financing aren’t suitable, invoice factoring may help. With this method, the factoring company purchases invoices from the contractor at a discount and then provides upfront payment for most of the invoice’s value. The remaining sum, minus a small factoring fee, is sent when the invoice is paid.
This form of contractor funding is also quite versatile, and cash can be put toward whatever the business needs. It also doesn’t have the same rigid requirements as most other construction financial services. However, quick pay is a better solution for general contractors who want to pay subcontractors.
Quick Pay
A quick pay construction program is specifically designed to make it easy for general contractors to manage subcontractor payments and advances. Viva’s Construction Quick Pay Program, for example, offers a streamlined process as follows:
- You (the general contractor) sign up for Quick Pay.
- You add your project to your online portal and choose which contractors you want to offer Quick Pay to for this project.
- If a subcontractor you’ve selected for Quick Pay wants accelerated payment, they apply via the portal.
- You receive a notification about the request, approve it and determine the advance amount.
- The subcontractor receives funding.
- The balance is settled when your client pays.
Learn More About Viva’s Construction Quick Pay Program
Viva isn’t your traditional construction finance company. We have a streamlined approval process and work with most general contractors. With Viva, you can easily manage, pay, and track subcontractor payments. This eliminates the most common finance-related issues in construction projects, keeps your projects on track, and helps you build stronger relationships with your subcontractors. Contact us to learn more.
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