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The Complete Guide to Contractor Financing

If you own a construction business, you’re likely already aware that cash flow management is fundamental to ensuring successful outcomes. Since labor and material costs have risen exponentially, many contractors struggle to secure financing from conventional banks and other traditional lenders because of the increased risk.

Fortunately, if this sounds like you, the team at New Bridge Merchant Capital has put together this comprehensive guide covering everything you need to know about contractor financing so you can quickly access the required funds to finish your upcoming projects.

In the following sections, you’ll learn about the advantages and drawbacks of popular contractor financing solutions in addition to how you can safely secure the working capital you need to successfully fulfill your proposals. Whether you’re working with a tight timeline, have a complex upcoming project, or seeking contractor financing for the first time, this guide has you covered.

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How does contractor financing work?

Access to capital is one of the most critical yet challenging aspects of the construction industry. Paying for labor, materials, equipment, and other expenses before invoices are collected can make all the difference between running a successful operation and permanently shuttering.

For some industries, traditional contractor financing companies offer a reliable source of low-interest working capital. However, because of the rising costs and inherent risks associated with construction, such as lengthy collection cycles and retainage funds, it can take years to secure financing, and smaller construction companies often have difficulty accessing these funds at all.

Fortunately, specialized contractor financing banks and alternative business lenders like New Bridge Merchant Capital provide funding solutions to the construction industry that help them complete their projects on time and as agreed. By taking advantage of alternative lending services, construction businesses can stay afloat as they coordinate their successful outcomes.

Identifying the right financing source and getting access to suitable financing ensures that your construction business has the capabilities to thrive in today’s ever-shifting contracting market. Working with a trusted business lender is essential for any contractor and can shave off years of unnecessary effort and stress.

Financing options for contractors

Every seasoned builder knows that accessing suitable financing for their projects is imperative. Contractors, however, often face unique challenges when seeking financing options from traditional sources. To help ease the process, business banks like New Bridge Merchant Capital now offer several specialized financing alternatives to accommodate contractors.

For builders that need financial flexibility, these funding solutions can provide quick access to capital for larger proposals, sustained cash flow, and continued growth. With a multitude of emergent lending tools available, contractors can now confidently explore their financing options to access the most cost-efficient borrowing solutions that help manage their operations and bring their construction projects to completion.

Now, let’s take a look at some of the most popular financing options for contractors:

Invoice factoring

Invoice factoring is a common financing option for contractors. This is because it delivers a quick cash injection in exchange for your outstanding invoices. The process begins when the contractor sells the invoice to a factoring company, or factor, who, in turn, immediately issues a payment of 70-90% of the total invoice. The remainder of the invoice cost, minus a small fee, will then transfer to the contractor once the customer has settled the final payment with the factor.

Invoice financing has become a sought-after solution in recent years, owing to its ability to provide contractors with a near-instant influx of cash to cover their operating expenses after a shortfall. One of the primary benefits of invoice factoring is that payments are not set in place over the long term and are, therefore, adjustable to downward fluctuations in cash flow.

The only real downsides to factoring are that you need to provide the invoices that must be transmitted before the financing can be approved, and it can cut into your profit expectations for an indeterminable time. If the contractor can’t supply invoices to warrant the funding, they would still need to come up with sufficient capital to cover all costs associated with labor, materials, and equipment.

In this type of financing, the factor becomes the mediator of all activity, collecting money from the customer on the contractor’s behalf. Some business owners perceive this method as intrusive, as it can result in customers and partners feeling uncomfortable. In some cases, they may even refuse to participate in the arrangement. Likewise, the lack of regulation could lead to excessive or hidden fees, making it paramount to research companies before entering into a factoring agreement.

However, invoice factoring, on the whole, can be an effective financing solution for contractors that need fast access to working capital. Just remember to practice your due diligence when sourcing your ideal factoring solution to avoid excessive borrowing fees.

Equipment financing

Equipment Financing

Construction companies looking to purchase operational equipment to boost productivity should explore equipment financing as means of supplementing their budgets. A secured bank loan lets you use the equipment as collateral which could lead to a lower interest rate than what you would otherwise find with an unsecured lending product.

In most cases, the bank will require you to make a down payment and show proof of your creditworthiness by evidencing financial statements. Some lenders may finance up to 100% of the equipment’s value, and disbursement amounts depend on how much liquidity you have in the assets. When you apply for this type of financing, the better your credit, the better rate you’ll receive.

The pros of equipment financing include access to lower interest rates and the potential for increased productivity from the machinery that can help offset borrowing costs. On the downside, you may be required to make a substantial down payment and will likely be subject to a credit check before your loan can be approved. Furthermore, should you default on your payments, the lender reserves the right to seize the equipment you’ll need to continue operating.

Equipment financing can be a viable option for companies in construction and other industries that need to upgrade their equipment. However, the right choice will always hinge on your unique requirements and risk tolerance.

Project cost financing

For smaller companies operating in the construction sector, securing the best financing for contractors upfront in the current lending environment poses several unique challenges. Fortunately, emergent solutions from alternative lenders specializing in construction can provide customized loan products to meet your specific requirements. Materials financing benefits contractors who want to expand their footprint and take on larger, more costly projects that can lead to greater profits.

Material purchases play a significant role in the cost of any construction project, eliminating the need to pay out of pocket or access a line of credit. A third-party provider pays the supplier on the contractor’s behalf, granting extended payment limits of up to 120 days.

Credit checks and financial statements may be unnecessary, as well, since the provider bases approvals on the creditworthiness of the project rather than the contractor. Generally, project cost financing offers higher spending limits, allowing the contractor to take on additional responsibilities without depleting their funds.

While you may encounter financing costs for the services rendered, those looking for the flexibility of low payments and the convenience of upfront project costs will likely still find material financing an attractive option.

In many cases, suppliers will issue discounts for cash payments. So, for construction contractors needing access to financing, project cost financing can be a great way to access the requisite materials and resources needed to keep their projects moving forward.

Home improvement financing

Home improvement financing is a lending solution in which the contractor becomes an intermediary between the lender and the homeowner. Since the financing company pays the contractor up front, this type of construction loan enables contractors to provide services for projects that may be beyond the reach of homeowners with limited funds.

Often free for contractors, this financing type is especially beneficial to businesses pursuing urgent home improvement projects. Builders have the assurance that they’ll be compensated almost immediately, allowing them to focus on the job at hand instead of chasing down unpaid invoices.

However, there are certain restrictions to consider. Home improvement funding is only available for home improvement projects, and each financing package has a limited amount. Repayment terms depend entirely on the homeowner’s creditworthiness.

This means the contractor’s rate of return can be unpredictable. Home improvement financing is a viable option for contractors working with clients who have access to limited funds, however.

Lines of credit

A business line of credit is always a reliable funding source for contractors. It gives you access to capital as needed, and you only pay interest on the amounts borrowed. The ability to withdraw and repay the funds as necessary ensures that businesses can continue operating within their budget and financial capacity.

A line of credit can either be secured or unsecured. An unsecured line of credit won’t require you to provide collateral to back the loan. Although this may be a more attractive option because it is simpler and requires paperwork, you can expect to come with a considerably higher interest rate. Secured lines of credit, where you provide collateral to secure the loan, typically include a higher credit limit and a lower interest rate.

Despite its many benefits, there are a few risks associated with business lines of credit to be aware of. They generally have a higher interest rate than a traditional loan, and borrowing costs are usually higher. Likewise, before getting approved for a line of credit, lenders require you to demonstrate an exceptional financial history and a strong credit score.

A business line of credit can be an extremely effective option for virtually any construction company. It gives you instant and ongoing access to funds as required, and secured options offer attractive interest rates. Once you evaluate the risks, a line of credit can be an invaluable source of working capital.

Equipment Financing

The pros and cons of contractor financing

If you have any experience with business borrowing, you already understand the challenges associated with contractor financing. It can be a gamble for traditional lenders that consider a multitude of factors when evaluating your credit risk. However, several new options have subsequently surfaced in the lending industry in response to this phenomenon.

And while many may seem appealing at first glance, some options can prove to be cost-prohibitive for contractors operating on thin margins. Factoring and merchant cash advances, for example, are potential solutions that produce quick results. But these options fall outside the realm of traditional lending and are not subject to the same regulatory environment.

With that aside, you’ll find several constructive methods for financing your building projects, and these options can help your company become more financially sound. Working with a trusted business loan adviser who is well-versed in construction lending and has access to the latest alternative financing will be able to set you on the right path.

A proper contractor financing solution frees up invaluable working capital and improves the cash flow of your forthcoming projects. Not only does it help mitigate risk, but it also positions you better to bid on larger projects and take advantage of more seasonal opportunities.

Here are a few more pros and cons to consider:



  • Frees up valuable working capital
  • Decreases risk for large projects
  • Streamlines cash flow
  • Seasonal opportunities



  • Lack of regulation
  • Costs can be higher than expected
  • Credit risk analysis can be complex and time-consuming

Getting approved for contractor financing

Getting qualified for contractor financing starts by convincing a lender that you can repay the money they supply. Business loan service providers are increasingly looking at more than just financial statements and credit scores when assessing creditworthiness.

Traditional sources of financing, such as bank loans and trade credit, still require a review of the contractor’s credit score and financial statements. Working closely with your financial manager or accountant is vital to ensuring an accurate reporting process, which can eventually help builders like you qualify for low-cost financing.

Securing the best financing options necessitates developing a good credit history, staying organized, and presenting accurate financial statements to your preferred lender. When you effectuate the strategies we’ve outlined here and consult with an expert business loan advisor, you can vastly improve your odds of qualifying for contractor financing.

Need help sourcing the ideal funding solution for your construction company?

As a small business owner, you’ll find more lending options available to meet your objectives than ever before, and New Bridge Merchant Capital can help you find the ideal solution to fund your next project. For more on our complete suite of business loan products, apply online to see what you qualify for. Or, for current loan pricing, call us now at 844-228-0593.

Work With a Leading Commercial Lender

At NewBridge Capital Solutions, our loan products can help businesses of all sizes. With our exceptional customer service and reputable funding, we have become a trusted leader in the commercial finance industry. If you want to apply for a term loan that can provide working capital for your business, make sure to contact us.
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