As a contractor, you understand how capital intensive your business can be. You need equipment, a team to execute, and capital to fulfill bids on upcoming projects. In lieu of this, the last thing most contractors want to do is spend their valuable time looking for financing.
Though a good portion of contractors who have been in business for years and have established both personal and business credit, can qualify at a bank; there is a larger pool of contractors who will get turned down by a traditional bank immediately.
Several factors come into play when seeking unsecured funding to grow your contracting business…
- Time in business
- Personal FICO score
- Monthly deposits and ending bank balances
- Credit history
Most traditional banks won’t consider lending unsecured capital to you unless you have been in business for at least two years and have superior credit (720+ FICO)
What’s the alternative for contractors who need access to immediate capital to fulfill their growth demands?
There are several financing vessels that are well-tailored to meet the needs of contractors. Equipment financing, business lines of credit, cash advances, and invoice factoring are the most common forms of funding in this specific industry. Now let’s break down how each program applies to your business and what it takes to qualify.
EQUIPMENT FINANCING AND LEASING
When seeking equipment for your upcoming project or business expansion, you will have the option to attain an EFA loan (Equipment loan with monthly payments- you own right away) or a lease where you have an option to buyout at the end of the term.
The good news here is that there are a select few lenders who will take more risk on a startup (under 2 years) and look more towards your projections than your current revenues. Also, credit is much easier to overcome for some of these groups. Partnering with a small business finance consultant for these scenarios will allow you the best chance of approval and the most favorable terms/rates given your situation.
You can expect to show underwriting your personal financials if you’re a startup, such as a Personal Financial Statement, Tax Returns, Bank Statements, and capital projections. Do NOT hesitate if your credit is badgered. There is always a solution if you connect with the right person.
BUSINESS LINE OF CREDIT
A business line of credit is a flexible product to have access to because it serves as a security blanket for when you are looking to bridge a receivable, want to hire or payoff sub contractors, or an unexpected expense occurs and you need a solution.
To qualify for this program, you will need to have been operating for at least a year, bringing in $40,000+/month in revenue, and have a 625+ FICO score.
All you need for an underwriting decision is a completed application, bank statements, and a copy of your ID and voided business check.
MERCHANT CASH ADVANCE
This is the most expensive form of alternative financing, but if you have a plan for investing this money into your business to yield a great return, then it is well worth the opportunity cost.
As cash advance is based off of your monthly deposits and credit isn’t an important factor for them in the underwriting process. We had a waste services contractor flip $50k twice in the span of 8 months. The good news here is that you can renew after the principal+payback amount is paid in full.
When you establish a great relationship with a cash advance lender, they will ordinarily feel comfortable lending to your business on a repeat renewal basis. If you are confident in your ability to flip money for a great ROI, this is the product for you.
Many contractors have to wait to get paid on their projects or work they’ve done on fulfilling their contractual obligations. Factoring your receivables, whether one time (spot factoring), or monthly; allows you immediate access to those funds.
You will only pay a nominal fee for each invoice that is factored. This product helps contractors service their cash flow problems instead of them waiting 30,60, or 90 days to get paid.
You will be required to submit an application along with bank statements and an A/R aging report for underwriting consideration. Credit scores are irrelevant here.
Do NOT get discouraged when you go to a bank and get declined for financing.
Your best bet is to consult with a small business finance expert who can lead you down the right path and help your contracting business increase profitability.