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SBA Loans for Construction Company: What to Know!

Starting a new construction business or expanding an existing one demands heavy capital investment. For such entrepreneurs in the construction industry, the SBA provides assurance of affordable financing. Construction business owners who are searching for financial backing to fuel their growth need to be conversant with SBA loans to make informed decisions.

by | Jul 9, 2024

SBA Loans for Construction Company: What to Know!

Understanding Loan-to-Value Ratio in ABL

tarting a new construction business or expanding an existing one demands heavy capital investment. For such entrepreneurs in the construction industry, the SBA provides assurance of affordable financing. Construction business owners who are searching for financial backing to fuel their growth need to be conversant with SBA loans to make informed decisions.

The Basics of SBA Loans

The SBA loans are remarkable in terms and accessibility to diverse loan products.  That is because the government guarantees the loans, reducing the risk on the lenders’ side and motivating them to provide loans. The interest charged on SBA loans is typically way below that of conventional loans. Expect rates ranging from 5 % to 8% plus the prime rate.  

For eligibility, construction businesses should meet SBA size limitations, show their need for the loan, and possess a good business plan.  Fees typically include a guarantee fee, which can be rolled into the loan amount.

Financial guru Dave Ramsey says, “SBA loans can be a game changer for construction companies and allow them the financial flexibility they need to do well in a competitive marketplace.” In The Total Money Makeover, Ramsey emphasizes the importance of exploring every means of financial support and advises businesspeople to add small business loans to their expansion strategies.

Advantages of SBA Loans for Construction Companies

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A significant advantage of SBA loans over conventional loans is that the interest charged is relatively low.  That could save you lots of money in the end, which can be reinvested in the construction or expansion of the business. 

The other good thing about SBA loans is that most have a long repayment period. The net effect of this is that a company will have enough time, whereby the cash flow stabilizes.

SBA loans have played a significant role in fuelling the growth of other construction companies, particularly among small and medium-sized firms. And so cheap is its financing that it has sustained the construction sector, growing the economy in billions yearly.

SBA Loans: How To Qualify and Apply

Even though SBA loans have many of the positive features seen above, the eligibility factors and required documentation are significant obstacles to securing approval. 

Your construction company is expected to show how the loan could be paid back through, most often, having sound business plans, financial statements, and a strong credit history.  Some collateral may also be required for the loan, but the SBA tends to be flexible in that area, too.

As the financial expert Robert Kiyosaki puts it, “Good entrepreneurs recognize that financial knowledge and investment decisions protect them when seeking funding for their ventures.” In his bestseller, Rich Dad Poor Dad, Kiyosaki highlights the value of maximizing the use of other people’s money through loans and investments to amass wealth.  

Through SBA loans, construction firms are opened up to possible expansion and growth opportunities while enjoying financial risks that are kept extremely low.

Understanding SBA Loan Requirements for Construction Companies

Factoring vs Tangible Assets

The most critical requirement is the experience and competency in construction management.  Lenders generally like to see that applicants have the experience and track record in related projects and a team with the right qualifications and certifications.

One must be well-prepared when applying for an SBA loan for the construction process.  Emphasize your competence through experience, credentials, and past performance to give the lenders confidence that you can do the project and repay the loan.

SBA’s Best Loans for Growing Your Construction Company

Expanding a construction business takes gigantic investments in machinery, technology, human resources, and, quite possibly, real estate.  The Small Business Administration offers loan products tailored to such needs.  Here are the top SBA loans that your construction company can get for business expansion:

SBA 7(a) Loan Program

Construction companies are more interested in the SBA 7(a) loan program these days.  This program is the most popular one, and it is designed for flexible uses such as equipment, real estate, and working capital.  Loan amounts can go up to $5 million. 

As for the terms, expect up to 25 years long for the working capital and 10 years for equipment loans.  The 7(a) Program offers the best way to finance expansion with interest rates that are lower than other loan sources.

SBA 504 Loan Program

This program is ideally helpful for purchasing long-term assets, such as real estate or equipment.  The 504 program gives you combined guarantees from the SBA and a Certified Development Company.

SBA Microloan Program

Microloans are good for minor or short-term funding needs. They provide working capital to finance inventories and equipment purchases through loans of up to $50,000. Although a microloan might involve a smaller amount, it quickly equips companies with money for new tools and extra staff needed for future projects.

SBA Disaster Loans

Though not usually considered a form of growth financing, SBA Disaster Loans can be a significant lifeline for construction companies trying to reconstruct or restore their operations after a disaster.  Their low interest rates and long payback terms are essential for business survival in hard times.

How to Apply for an SBA Loan

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The application process for an SBA loan can be taxing, and the applicant must be thorough in their documentation.  The applicant must have information about the company’s financial and ownership history, operation, and future projections.

Step 1: Preparation and Documentation

Get together all the necessary papers before applying.  This includes a detailed business plan that explains the history of your company, its objectives, the specifics of your complex projects, and the market analysis.

You will also need to provide the financial statements of the previous three years, including the balance sheet, income statements, cash flow statements, and personal and business tax returns.  Ensure that both your personal and business credit reports are up to date.

Step 2: Determine Eligibility

Review eligibility requirements for an SBA loan.  You must be a for-profit business located in the United States.  You must meet the SBA’s definition of small business and have invested equity to show for it. Finally, you must prove that the loan proceeds will serve a sound business purpose

Step 3: Choose the Right SBA Loan Program

Find an SBA loan program that suits your particular needs. While the 7(a) loan is perfect for working capital, purchasing equipment, or refinancing debt, the 504 loan program is ideal for buying fixed assets like real estate or machines. Suze Orman, a finance expert, says borrowers should settle for a loan program that agrees with their business goals to get the most value out of the loan.

Step 4: Locate a Lender approved by SBA

Find an SBA-approved lender with Flaney Capital’s lender match services. We guide your business to the best lender based on your needs and profile.  Finding a good lender is essential for lower interest and reduced financing costs.

Step 5: Submit Your Loan Application

Send all the necessary documents to your chosen lender.  Be ready to provide any extra details or, even better, supplementary information the lender may request during the evaluation. Being transparent and truthful during the loan application process increases the chances of success.

How to Leverage SBA Loans to Grow Your Construction Business

Navigating the Due Diligence Process and Associated Costs

Instead of financing current needs only, SBA loans could drive businesses’ long-term growth and sustainability.  For instance, construction companies can use these loans to invest in technology improvements, workforce training,  marketing, and market expansion. 

These reinvestments will further make the company stronger and increase its competitiveness for a sustained growth rate in the long term.

The Future of SBA Loans in the Construction Industry

As the construction industry continues to transform, so will the need for SBA loans to facilitate growth and innovation. New technologies, sustainability practices, and infrastructure development give construction companies broader avenues to leverage SBA loans to maintain their competitiveness and relevance.

Are you ready to take your construction business to the next level?  Contact Flaney Capital for advice on tailor-made SBA loan options for your growth and success! Call us at 1-888-822-0844.

Watch Our Videos

Are you ready to take your business to new heights? Discover the power of the SBA Business Industry Program. With its comprehensive eligibility criteria, underwriting requirements, and loan guarantees, this program provides accessible and affordable loan options for businesses in rural areas.

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FAQ

Here are some answers to Frequently Asked Questions.

What are the main advantages of ABL loans?
ABL loans allow companies to use their existing assets as collateral for financing, providing greater flexibility than traditional lending methods.
Are there any risks associated with ABL loans?
Yes, if a business cannot repay its loan, the lender may seize the assets used as collateral. Businesses need to understand this risk before opting for an ABL loan.
How does accounts receivable factoring work for ABL loans?
In accounts receivable factoring within the context of ABL loans, a business sells its outstanding invoices (accounts receivable) at a discount to obtain immediate cash.
What is involved in the due diligence process for obtaining an ABL loan?
The due diligence process typically involves assessing a company’s financial health, including reviewing its balance sheet, income statement, and cash flow statement, among other things.
Can all types of companies apply for an ABL loan?
While any company can apply for an ABL loan, it is particularly beneficial for those with a high volume of accounts receivable or significant tangible assets.