Business Construction Loans: Two Different Needs

Funding a build: the real estate construction loan

A construction loan for a commercial property pays out in stages as work is completed and is secured by the project.

A lender approving a build loan looks at the plans, the budget, the contractor and the land. Funds release in draws after inspections, and you generally pay interest only until the building is finished, at which point a longer mortgage or permanent loan takes over.

Expect a sizeable down payment, a detailed budget and a review of the finished property's value. This is real estate lending, handled by banks and specialized lenders. ROI Funder does not place construction loans for buildings or commercial mortgages. Our commercial real estate loans page explains that category and where it fits.

Funding a contractor: cash flow is the real problem

Contractors usually pay for labor and materials before the client pays, so the gap is a working capital problem.

A general contractor on a commercial job may front crew wages every week and buy materials upfront, then wait on a draw schedule that pays 30 to 60 days later. Retainage, which clients hold back until completion, stretches the wait. Many subcontractors wait even longer on payments from the general contractor.

That gap is where ROI Funder helps. Construction trades funding covers the typical needs: payroll, materials, bonding costs and equipment.

Products that fit a contractor's cash cycle

A line of credit, working capital and equipment financing are the best-fitting ROI Funder products.

• Business line of credit: draw for each job's materials and repay as the client's draw arrives. Decisions in 24-72 hours.
• Working capital: same business day on approved, complete files, useful for payroll before a payment lands.
• Equipment financing: excavators, trucks and tools, funded in 2-7 days with the equipment as security.

Funding ranges from $5,000 to $5,000,000, in all 50 states, matched across our 100+ funder network.

An illustrative payback example

Compare the profit on a job you can take with funding against the financing cost.

Example: a mechanical contractor wins a $240,000 job with a 20 percent expected margin, or $48,000. It needs $70,000 for materials and the first two payrolls, and the first client payment is 45 days away. If financing costs $7,000 over three months, the job still nets about $41,000 before overhead.

Without funding, the contractor either turns the job down or squeezes other work. The math supports borrowing, but only if the margin holds. Pad your estimates for change orders and weather delays, because cost overruns eat the cushion first.

Restrictions you should know about

Many funders restrict residential remodeling and new residential construction.

Funders have different appetites for the construction sector. Many restrict residential remodeling and new residential construction because of high failure and dispute rates. Commercial trades, specialty subcontractors and service-oriented contractors generally have more options. If your work is mainly residential, expect fewer offers and be wary of anyone who promises certainty. ROI Funder will tell you plainly if your file is a poor match.

Licensing, insurance and clean bank statements help in every case.

What qualifies and how to apply

ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ in monthly revenue.

Apply online in a few minutes with a soft credit pull; it does not affect your score and you can decline any offer. A complete file is the application plus three months of business bank statements. Construction bank statements often swing widely; funders look at the average, so explain any big gaps up front.

For job bidding and cost control, our beginner's guide to bidding construction jobs is a useful read before you borrow.

Managing cash through retainage and pay applications

Plan for retainage and pay-application timing before bidding, because they decide how much working capital a job needs.

Many construction contracts hold back five to ten percent of each payment until the project is complete. That is retainage. On a $500,000 job, the held amount can be tens of thousands of dollars that you earned but cannot spend for months. Pay applications also follow a schedule: you submit, the owner reviews, and payment arrives weeks later.

A simple planning method is to build a weekly cash chart for each job. Show payroll and material costs going out each week and the expected receipts coming in. The deepest point on that chart is the working capital you need. Add a cushion for change orders.

Subcontractors should also watch pay-when-paid clauses, which can delay their money until the general contractor is paid. Knowing these terms in advance lets you size a line of credit sensibly rather than scrambling mid-project. For more on cost control, see construction accounting.