How to Get a Construction Loan

How and where to get a construction loan

Close the construction loan
Close the construction loan. Tom Merton/Getty Images

You have the construction ideas and knowhow. Customers have faith in your ability and a need for buildings to go up now. There’s just one piece of the puzzle left to put in place and start work – the financing. Customers usually pay when a job has been finished. In the meantime, you have to pay for the materials, workers’ wages, fuel, insurance and any other recurring expenses. A construction loan may be the solution.

Why Should Anybody Lend You Money?

The construction business is like any other in this respect. If people lend you money, it is for one or more of the following reasons:

  • They think you will pay back the amount of the loan, plus all the interest, in accordance with a given repayment schedule
  • They obtain rights to something you own that allows them to sell that item and recover their loan, in the event that you do not repay as agreed
  • They want to encourage businesses like yours to start and to grow.

More often than not, this means that you must present a convincing business case about why you will make money and honor the terms of a loan agreement.

Know What You Want

When you have a clear idea of what you need, you will already have taken a big step forward. Write it down in a written document that lays out the basics of:

  • A description of the project to be done or the need or opportunity to be handled
  • A timetable showing cash you plan to spend and cash you plan to receive, with precise dates in every case. As a general rule, the later you can make any construction expenditure (without delaying your project) and the sooner you can get cash back in, the better – for your business and for your loan application.
  • Any relevant supporting information such as company revenues and profits for last year and the year before, and the proposal you will make to your customer.

In some cases, this may be as simple as a ‘back of an envelope’ calculation. In other cases, a more detailed presentation may be needed using a spreadsheet application or information from a construction accounting software program.

Possible Loan Sources

When you have your financial need and cash flow plan sorted out, the next step is to look for a suitable source of financing.

  • Your bank. This is the obvious choice. Your application will be reviewed in the light of the size of your business, any obvious trends (revenue growth, for example) and any past credit history.
  • Independent or specialized business loan companies. They may be better positioned to appreciate the merits of your project – or to simply dispose of any construction-related collateral you offer in order to secure your loan in the event of non-repayment.
  • Government agencies. Rather than loaning you money directly, small business administrations may offer a guarantee on your behalf to a lender such as a bank.

Comparison Shopping

If your business plan is convincing and you try more than one possible avenue, you may end up with more than one loan offer.

That will allow you to compare terms and conditions such as interest rates and possibilities for early repayment. This should put you and your company in a relatively good position. You have a plan that you think will work; that they think will work; and the chance to pick the most favorable loan offered to you.

Consider Getting into Practice for Asking for Loans

Credit history can play a key role in getting a loan. Good credit history can be built by actions as simple as asking for a bank overdraft; and demonstrating that you know how to use it sensibly and according to the bank’s rules. In the same way, it may be advantageous to prepare for future growth by securing a small construction loan now (remember to make a business plan). Then show that you know how to repay it correctly.