How Alternative Lending Can Help the Construction Industry
When you think about construction lending, you probably think about traditional loans or a traditional line of credit first. There are advantages to traditional bank loans and lines of credit, but with the advantages, there are also a number of disadvantages. For instance, a bank loan has strict underwriting requirements. You have to have significant assets, a great credit score and a solid business history. This can be a problem for some businesses. When you need construction equipment, you may need to start looking into other options.
In commercial construction, factoring is common. When it comes to construction work, you may not receive payment for up to 90 days. Most businesses do not have time to wait for that money. The cost of payroll, materials and other costs won’t stop because you’re waiting on paid invoices. As far as alternative lending goes, factoring is one of the cheapest routes. A company advances the contractor a percentage of the pay, so they can keep the business running.
When you start a project, it will take you money to get started. New projects cost you in payroll, insurance, materials and other costs. In mobilization funding, companies advance contractors the money that they need upfront. This helps clients receive money quicker, but the interest rates tend to be higher.
Merchant Cash Advance
A merchant cash advance is easy to obtain. In fact, the underwriting process is instant. While many contractors appreciate the convenience, you do have to keep in mind that convenience comes at a price. The fees associated with merchant cash advances are extremely high. In fact, the APR might exceed 200%. For some businesses, the speed and convenience is worth the construction equipment.
For those who may not be able to get a traditional credit line, the SBA loan is a better option. Even businesses with fair credit and assets may not be able to receive traditional funding. The SBA backs loans for small businesses in the interest of growing businesses and feeding the economy. These specialized loans are for small companies that need the extra help. While traditional banks handle the loan, the government backs up a percentage if you default. Fortunately, the rates of an SBA loan are comparable to a normal line of credit.
If you need to pay for construction equipment, you can’t always rely on your own cash flow. Likewise, you may not qualify for a traditional bank loan. This is where alternative lending options come into play. Keep in mind that every lending option has its advantages and disadvantages for different companies.