Cash flow constraints are a common issue for contractors, especially since industry payment cycles tend to be unpredictable. For many small contracting businesses, this means it’s only a matter of time before they experience a financial shortfall and need to start exploring options for additional working capital.
Luckily, there are sources for small business loans in New Jersey that can give you a reliable path to overcoming delayed payments and unexpected losses. Contractor financing is an invaluable tool for securing materials and assets. The lending solutions let businesses scale their projects with confidence. Offered in myriad forms, from lines of credit to invoice factoring, contractor financing helps businesses make strategic decisions about when and where to invest, all while ensuring constant and reliable cash flows.
How Does Contractor Financing Work?
Building a successful business requires effective management of cash flow. Contractors often discover early on that while costs for a particular project may be considerable at the outset, with materials and labor, it will be several months before a project is completed and paid for. Such a cash flow issue can force contractors to seek financing to cover their costs until the next payment arrives.
Banks and other traditional lenders consider it risky to finance construction projects, leaving many builders struggling to encounter suitable financing options for project expenses like labor, materials, and equipment. In the following sections, we’ll introduce you to a range of contractor financing solutions along with the advantages and disadvantages of each.
Contractor financing is a category of financial instruments available to construction businesses that can help ease their cash flow issues. These loans are divided into two types: advances and deferrals. Advances cover material costs and other expenses before they’re paid for, while a deferral effectively lengthens payment terms and allows the contractor to fund labor, materials, and equipment more slowly.
In other industries, businesses can access traditional funding sources with minimal risk, enabling them to finance their operations at relatively low rates. Because of the risks inherent to construction, however, traditional banks and lenders are hesitant to provide financing products to contractors.
Without access to conventional financing, construction businesses have started turning to a range of emergent small business loans in New Jersey designed to meet their requirements. These specialized solutions exist to bridge the gap between the time when payments are received and when your expenses must be covered.
Through an array of alternative contractor financing options, construction businesses can rest assured in knowing that cash is available to pay for labor and materials while guaranteeing they get paid for each project. Whether through a cost deferral or an advance, you can use contractor financing to keep your business profitable.
What Are The Typical Types of Contractor Financing?
Contractors face increasingly complex challenges when seeking working capital. To overcome these obstacles, forward-looking companies have stepped into the breach with an array of options to help keep their supply chains healthy and thriving.
From invoice factoring to lines of credit, you’ll find an array of alternative financing solutions available to contractors who need capital to grow their businesses, take on larger projects, or meet predictable gaps in cash flow. Let’s take a look at a few of these options in more detail below.
Traditional Bank Loans
As a business owner, you’ve likely heard about traditional bank loans as a potential working capital solution. These loans are typically offered by established banks or credit unions; however, they may also be obtained through online lenders and creditors specializing in business loans.
A traditional bank loan is a sum of money lent to a business by a financial institution; this money must then be repaid in full, with interest, over a previously agreed upon period of time. Usually, bank loans come with fixed interest rates and loan terms ranging from just a few months to several years. Bank loans also give businesses access to the funds needed to cover their daily expenses, purchase new equipment, and implement needed marketing strategies.
However, it’s worth noting that obtaining a traditional bank loan can be a lengthy and arduous process. In most cases, banks require extensive paperwork to verify the borrower’s financial history and the current financial health of the business. Additionally, the financial institution may need to conduct a detailed review of the proposal to ensure that the owners can adequately manage and repay the loan.
For companies that qualify for a traditional bank loan, there are both advantages and disadvantages to consider. On the plus side, the loan offers a fixed loan amount with fixed interest rates. The is usually secured with collateral, ensuring that the bank will be paid back. On the downside, the process to obtain a traditional bank loan can be lengthy and requires a considerable amount of documentation. Moreover, the bank may charge additional fees for setting up the loan along with any late payments.
A traditional bank loan can provide a dependable source of working capital for businesses. If you have time to complete the necessary paperwork and have good credit scores, the odds of qualifying for small business loans in New Jersey are strong. However, remember to weigh the pros and cons carefully before committing to a loan agreement.
Equipment Financing
Equipment financing is ideal for construction companies looking to purchase large equipment such as heavy machinery, vehicles, tools, and other operational equipment that makes workers more productive. It works like a car loan or mortgage, wherein a bank loans the construction company money to purchase the equipment and then uses the equipment as collateral. Generally, the higher the amount borrowed, the higher the interest rate, which is always something to consider.
Oftentimes, the borrower would need to put down a certain deposit percentage for the value of the equipment. However, some lenders offer 100% funding. Irrespective of the deposit percentage, the loan would need to be approved with a thorough credit check and financial statement review. Moreover, the property is at risk if you miss payments, since the bank is within its rights to repossess the equipment.
The pros and cons of such financing are worth mentioning, as well. To begin with, the interest rate is usually lower since you’re securing the loan with collateral. The increased productivity from the new equipment, however, will help cover the cost of the loan. On the other hand, a down payment may be required to obtain the financing. The risk of not making payments on time could result in the repossession of your equipment, something that always hangs over the heads of those who fail to do so.
Equipment financing is a viable solution for construction companies. It can help them obtain the necessary operational tools to be more productive, however, one must be cautious of the potential risk that comes with it. Remember to factor in the deposit percentage, the interest rate, as well as the credit check and financial statement review that is typically required.
Lines of Credit
Business lines of credit can be invaluable sources of working capital for contractors and essentially any other small business owner. This lending option offers shorter-term funding than a traditional business loan, allowing for more manageable withdrawals and payments. It also provides a flexible method of borrowing money when necessary, with no need for lengthy applications or waiting periods.
A business line of credit comes in two forms: secured or unsecured. An unsecured line of credit, also known as a “revolving line of credit,” does not require collateral and carries a higher interest rate. Secured lines typically come with higher limits, but lower interest rates, since the lender can seize assets if need be.
The benefits of a business line of credit are numerous. The flexible nature of this financing means you only pay interest on the amount you borrow, giving you control over expenses without the risk of over-borrowing. You can also withdraw and repay the money as many times as you need, allowing for more precise allocations of finances.
On the other hand, business lines of credit also come with certain drawbacks. These lines of credit usually carry higher interest rates than traditional lines of credit. Likewise, the nature of a line of credit usually requires strong financial statements and a good credit score before lenders will approve your application.
Merchant Cash Advances
Merchant cash advances are an excellent option for contractors who need reliable sources of working capital. A merchant cash advance gives businesses an up-front sum of money in exchange for a share of their future revenue. This percentage of future income is usually determined by the cash advance company after analyzing the contractor’s cash flows. It is then deducted automatically on a daily basis until you pay the balance owed.
The simplicity with which cash advances can be secured makes them attractive to contractors. The entire process can usually be done in under a week. No collateral is required, as the percentage of future income serves as repayment. This can be a substantial benefit for businesses that don’t have a lot of assets.
However, while merchant cash advances are typically easier to obtain than traditional loans, the high cost of capital can be notably prohibitive. Interest rates are often higher for these advances than for traditional bank loans. Also, since the calculation of the rate of repayment can be difficult to predict, contractors may end up paying a lot more than they bargained for if business suddenly slows down.
Small Business Administration (SBA) Loans
Small Business Administration (SBA) loans can provide an advantage for contractors who don’t need instant working capital. The SBA is a federal program that supports small and medium-sized businesses providing them with access to capital and financial assistance, usually offering loan programs tailored to contracting businesses.
These lending platforms target companies in the construction industry and may provide access to the funds needed to support operations. SBA loans are backed by the government and offer borrowers lower interest rates, longer repayment terms, and large loan amounts. With an SBA loan, contractors get access to the financing required to make the necessary investments in their business. Recent federal regulations have made the process of obtaining business loans slightly easier, as well, only increasing the accessibility of this product.
However, the SBA loan application can prove lengthy and complicated. Applicants must provide documents such as financial records, business plans, and tax returns, which can take a considerable amount of time to gather and organize. Once all the proper paperwork has been submitted, you may still face months of additional waiting while your application is reviewed, approved, or denied.
In terms of pros and cons, remember that interest rates for an SBA loan may be lower with the SBA guarantee, but the repayment term might be longer than traditional loans. Also, SBA loans are for very specific purposes and are often used for working capital or to purchase equipment, buildings, inventory, etc. Businesses cannot leverage them to pay dividends, however. On the plus side, since these loans are guaranteed by the government, your credit score and other documents won’t be as important.
Which Aspects of Your Contractor Business Can You Finance in NJ?
As a contractor in New Jersey, you’ll encounter several options for financing the various parts of your business. Here’s what contractors typically finance in New Jersey:
- Labor: Covering labor costs can help manage the cash flow of your business.
- Materials: Taking out a loan for materials can help ensure you have all the necessary resources to complete the job.
- Equipment: Financing equipment can help you acquire the tools and machinery needed for job completion.
How to Qualify for Competitive Small Business Loans in NJ
Identifying the right New Jersey small business loans for contractors is an important process. You’ll need to consider the terms, costs, and potential benefits that come with each loan. Contractors should always measure their options objectively and look for a financial partner who can provide them with the flexibility to do business on their terms.
New Bridge Merchant Capital assists contractors like yourself with evaluating their financing options to find the right fit for their business. After consulting with one of our seasoned advisors, we’re certain that you’ll be able to make an informed decision about which business financing product best meets your needs.
Complete your application online now or call New Bridge Merchant Capital at 844-228-0593 for a loan quote.
