Contractor Loans: Costs, Terms & Requirements

Contractors needing to invest in materials and supplies for new jobs can get contractor loans. A good business loan for contractors is a line of credit, which you can use repeatedly and funds in just one to three days. Other loans for contractors include longer-term Small Business Administration (SBA) working capital loans for large, capital intensive projects.

Top 6 Business Loans for Contractors

How We Determined the Best Business Loans for Contractors

Regardless of the size of your construction business, you often must invest in your growth before onboarding new clients and servicing more job sites. This makes accessing capital important for contractors like yourself. Also, the speed of funding and the ability to access growth capital on a recurring basis is paramount to a contractor who wants to scale fast.

Traditional small business loans, such as bank loans, are often difficult for contractors to get approved for because traditional lenders view the construction industry as risky and unpredictable. Larger construction businesses―at least $1 million in annual revenue―will find it easier to get approved for those more traditional contractor loans, but they’re only typically used to buy out an existing construction company. These reasons are why we’ve chosen more alternative online loan options on this list.

As a contractor, you have many different needs that vary based on the size of your business. A one-person plumber and a large construction company working on building a new hospital will have different capital needs. However, both need general working capital to keep their business operating while they gain new business and wait for customer payments, especially with residential construction projects peaking in summer months.

Business Line of Credit

A business line of credit is a revolving line you can repay and use repeatedly to fund the growth of your construction company or cover cash flow gaps for your seasonal business. You’ll only pay interest on the credit you use, so a line of credit is a good fit for contractors needing quick financing to cover expenses on a new project with a fast start date.

A general contractor line of credit is a good choice for you to have a line of credit that you can draw down against when needed. You won’t have to wait to apply for a loan to get the financing you need to begin work on a new job, and you won’t have to wait for customer payments to fund payroll if you have other contractors working for you. If you’re approved, there’s no reason not to get one.

Business Line of Credit Interest Rates & Fees

• Starting interest rates: As low as 13.99%
• Annual percentage rate (APR) range: 10% to 75%
• Prepayment penalty: None
• Other fees: Some lenders may charge service fees or other fees if you don’t use your line of credit within a year, but these aren’t common.

Business Line of Credit Terms

• Loan amount: Up to $100,000
• Repayment term: Up to 12 months
• Repayment cycle: Weekly or monthly
• Time to funding: One to three days

Business Line of Credit Qualifications

• Credit score: At least 600
• Time in business: At least one year
• Annual business revenue: At least $100,000

Best Business Line of Credit

Short-term Contractor Loans

Short-term business loans for contractors are a good fit for those who need growth capital and have predictable expenses. This is because short-term contractor loans give you a lump-sum amount and require fixed weekly amortized repayments of principal and interest. These loans can carry an expensive APR of up to 50% but have a competitive total cost of capital if you repay the loan within 12 months.

You can use short-term contractor loans to make immediate purchases because you’ll receive a lump sum amount and start paying interest. For example, if you want to hire a new employee for an upcoming job and know what his or her salary will be for the life of the contract, you can request a lump sum amount and use it to cover the salary until the job is complete.

Short-term Business Loan

• Starting interest rates: As low as 9.99%
• Expected APR range: 10% to 100%
• Prepayment penalty: None

Short-term Business Loan

• Loan amount: Up to $500,000
• Repayment term: Three to 36 months
• Repayment cycle: Weekly
• Time to funding: One to three days

Short-term Business Loan

• Credit score: At least 600
• Time in business: At least one year
• Annual business revenue: At least $100,000

Best Short-term Business Loan

Invoice Financing for Contractors

Invoice financing, or accounts receivable financing, helps construction companies unlock the value of their invoices earlier by issuing a loan based on their outstanding invoices due in less than 90 days. This financing is also known as a business contract loan and works similarly to a business line of credit, and you’ll make draws using your customer invoices as collateral. Plus, you’ll only pay interest on the amount you borrow.

Invoice financing is best for contractors who invoice customers. For example, contractors who perform commercial work often bill their clients on net 30- or net 60-day terms. So, if you need to ramp up your next commercial project within that 60-day window―known as drag-on liquidity as you wait for customer payments―you can use invoice financing to unlock the value of your unpaid invoices.

Invoice Financing Rates & Fees

• Starting discount rate (fees): 0.5% of each invoice per week
• Estimated APR: 10% to 79%
• Prepayment penalty: None

Invoice Financing Terms

• Loan amount: $1,000 to $100,000
• Repayment term: 12 to 24 weeks
• Repayment cycle: Weekly
• Time to funding: One to three days

Invoice Financing Qualifications

• Credit score: No minimum to 530 or higher
• Invoice qualifications: Must be due in the next 90 days
• Other requirements: Customers must be creditworthy

Best Invoice Financing Companies

Equipment Loans for Contractors

Equipment financing is a loan used to purchase large equipment with a long shelf life. The lender uses the equipment you’re buying as collateral for the loan. This financing is a good fit for larger construction businesses with large job sites like schools or hospitals. These businesses might need to buy new bulldozers, loaders, or excavators, and equipment financing will help you pay for those costs.

Equipment financing will only be a good fit for a small fraction of contractors because individuals working for themselves won’t need large equipment. You can structure equipment financing as either a loan or a lease, and the costs of your financing will depend on the one you choose, with a lease carrying a more affordable payment.

Equipment Financing Interest Rates & Fees

• Interest rates: 6% to 9%
• Prepayment penalty: None

Equipment Financing Terms

• Loan amount: $10,000 to $500,000, up to 95% of equipment costs
• Repayment terms: Two to seven years, based on the useful life of the equipment
• Payment frequency: Monthly
• Funding speed: Two to five business days

Equipment Financing Qualifications

• Credit score: At least 600
• Down payment: At least 5%
• Collateral: Financed equipment
• Time in business: At least two years; startups with industry experience might qualify

Best Equipment Financing Companies

Business Credit Cards for Contractors

Business credit cards are a good fit for every contractor because they’re easy to qualify for, and you can use them to finance smaller working capital expenses. Every contractor should have a business credit card to use in case of an emergency. Many of these cards provide cash back or points that you can redeem for rewards, and 30-day terms to pay off your purchases before you incur any interest.

For example, one good use of a business credit card is fuel on your company truck. You’ll have many trips going to pick up supplies, going to the job site, or taking hauls of debris off the property. Fuel expenses will cost you regardless of how you pay for them, but a business credit card can give you a discount at the pump.

Another great reason to use a business credit card as a contractor is that you can set up automatic recurring payments for things like your contractor’s insurance premiums. This way, you won’t forget to pay any bills while you’re growing your construction business, and you can even earn rewards.

Interest Rates & Fees

• Interest rate: 15% to 29%; some have 0% introductory offers
• Annual fee: Up to $350

Business Credit Card Terms

• Loan amounts: Up to $100,000 but typically less than $30,000 for most businesses
• Repayment terms: 30 days interest-free
• Time to funding: Instantly to two weeks, which is the time it takes to receive your card
• Initial rewards: Introductory APR of 0% for seven to 18 months, and a cash or points bonus if you spend a certain amount within the first two to six months.
• Ongoing rewards: Cashback or rewards points

Business Credit Card Qualifications

• Credit score: At least 680 for best offers

Best Small Business Credit Cards

SBA Loans for Construction Companies

The SBA partially guarantees SBA loans. This allows lenders to offer long repayment terms with some of the lowest rates available to businesses. You can use these loans to finance the purchase of long-term equipment to buy real estate or fund the purchase of a construction company. These loans aren’t an option for small contractors needing short-term working capital.

For example, if you’re looking to buy out a competitor’s book of business or to purchase a new facility to house your landscaping equipment, then this could be the right option for you. However, if you need a short-term cash infusion to get your new marketing plan off the ground, there are other options that could work better.

SBA Loan Interest Rates & Fees

• Interest rate: 7% to 11%
• Prepayment penalty: None; you can save money by paying it off early
• Origination fee: 0.5% to 3.5%
• Loan packaging fee: $2,000 to $4,000
• SBA guarantee fee: 2% to 3.5%

SBA Loan Terms

• Loan amount: Up to $5 million
• Repayment terms: Up to 10 years; up to 25 years for real estate
• Repayment cycle: Monthly
• Time to funding: At least 30 to 90 days

SBA Loan Qualifications

• Minimum credit score: 680
• Collateral: Typically required
• Down payment: At least 10% to 20%
• Time in business: Any, from startups to mature businesses

Top SBA Lenders

Tips for Getting a Contractor Loan

Contractors may find it difficult to qualify for the right loan, but taking certain actions can improve your overall chances of getting approved. You need to maximize your revenue and be able to paint the picture to your lender that your business is stable and growing. To do that, you should follow the three key tips that we’ve put together to help you get approved for a business loan.

1. Demonstrate Your Ability to Repay the Construction Loan

What interests your lender is your ability to repay what you borrow. It isn’t in the business of lending to organizations that default. This makes it important for you to represent your business in a way that shows it’s growing and capable of repaying more than what you’re borrowing.

While your credit score and annual business revenue are important to meeting the minimum qualifications standards of your lender, your ability to repay is the most important thing. Many lenders calculate your debt service coverage ratio (DSCR) to determine whether you’ll be able to repay the loan.

One great way to show this is to have contracts in place with upcoming jobs, allowing you to show increasing revenue. Furthermore, only apply after you’ve done enough construction jobs to have adequate capital already in the bank.

2. Ensure Your Construction Business Meets Minimum Qualifications

Many businesses apply for loans for which they have no chance of getting approved. Most lenders list their minimum qualifications as the absolute lowest standard for approving a loan. However, most businesses that receive loans far exceed those minimum requirements. Applying for something you have no chance of getting is a waste of time and money.

You should focus your time on only applying for loans in which you exceed the minimum qualifications. If you don’t exceed the minimum qualifications, then work on your credit profile or business revenues before you apply.

As a contractor, you can do this by forming a personal relationship with your banker or preferred lender. Ask them how they view the construction industry and inquire about your odds of approval, given your specific circumstances.

3. Don’t Request Larger Contractor Loans Than Necessary

You never want to borrow more money than you need because that means you’ll be paying interest on that money. As a contractor, your ability to meet your expenses may already be tight, so it’s important you don’t take on additional interest payments you don’t need.

Asking for more than you need could also reduce your odds of receiving a loan for your contracting business. Part of the application process is to quantify how you’ll spend what you’re asking for. If the lender determines that you’re asking for too much money, then it could deter it from approving the loan at all because it might lose faith in your ability to operate.

Bottom Line

Receiving approval for a loan if you’re a contractor can be difficult because your industry can be seasonal and inconsistent. However, you still have plenty of options to get the working capital you need to fund your day-to-day business activity. The best business loans for contractors are flexible and can fund quickly to help you get the capital you need.