Finding financing has always been a challenge for construction subcontractors. Most banks and financial institutions are not comfortable with the industry and only finance large companies. Unfortunately, small construction companies have the same financing needs as their larger counterparts. They need financing to pay for:
- Office expenses
- Other expenses
In this article we discuss four ways to finance a small subcontracting business.
1) The Small Business Administration (SBA)
The SBA does not give business loans. Rather, the SBA guarantees loans for banks, which allows banks to lend to small businesses. SBA loans can be a great option for smaller businesses.
The SBA’s Microloan program provides business loans and technical assistance to businesses that need less than $50,000. Microloans have easy requirements and are often disbursed quickly. Furthermore, loan providers also offer business management and financial advice – both of which are extremely useful for entrepreneurs. We highly recommend this program.
The SBA also offers other loan programs, namely the 7a Loan Program, which can help if you need a larger amount of money. However, getting this type of financing is more difficult and takes longer.
2) Construction factoring financing
An increasingly popular financing option among subcontractors is construction factoring. This program provides financing to subcontractors who have cash flow problems. Most subcontractors experience problems because their commercial clients or general contractors pay invoices in net 30 to net 60 days. Few contractors can afford to wait that long to get paid. They need money sooner to pay business expenses.
A factoring company can finance slow-paying invoices or progress payments and provide you with an advance. This advance improves your cash flow and enables you to run and grow the company. Qualifying for construction factoring is relatively easy, and invoices can usually be financed quickly.
3) Your own resources
Most small businesses, regardless of industry, are usually financed directly by their owners. As a result, owners put in their savings, mortgage their homes, liquidate retirement plans, and use personal credit cards to launch businesses and pay for expenses.
Entrepreneurs have to invest their own money before they can convince others, or a bank, to invest. One word of advice: starting a business is risky, and most businesses fail within a year or two; only invest money that you are willing to lose. We recommend not betting your home or retirement on your business.
4) Friends and family
Many entrepreneurs also get financing by convincing friends and family to invest in the business. Friends and family can invest in one of two ways: they can buy equity in the business and get ownership, or they can provide a loan.
Each option has it’s advantages and disadvantages. A loan is usually preferable because it allows you to keep control of the business. However, loans have to be paid back and are sometimes secured by personal assets. Consider this option carefully.
Keep in mind that if you accept money from a friend or family member, you may put the relationship at risk. If the business fails, you could lose not only your business but also your friend/family member.
Get more information
Are you looking for financing? We are a leading construction factoring company and can provide you with competitive terms. For more information, get an online quote or call us toll-free at (877) 300 3258.