General Contractor Loans: Everything You Need to Know About Getting a Loan as a Contractor

In the construction industry, a general contractor is the party who enters into the prime contract with the property owner. General contractors are responsible for overseeing the entire construction project, which means they need to manage several moving parts over the course of a job. These responsibilities can cause cash flow problems and many construction businesses look for general contractors loans to fill the gaps.

A construction business can be both a general contractor and a subcontractor, depending on who hires you to complete the job. For example, you’re the general contractor if a homeowner hires you to replace their roof and you sign a contract directly with the homeowner. You are also the general contractor if your business is overseeing the build of a new commercial building and is in charge of hiring subcontractors to focus on specialized work, such as the electrical components, plumbing, or roofing. If you’ve been hired to complete specialized work by another general contractor, then you’re a subcontractor.

As a general contractor, you may need additional working capital to maintain your cash flow, pay your employees and subcontractors, or finance the purchase of specific equipment, raw materials, or inventory. General contractor loans and other alternative small business loan options can provide the working capital your construction business needs to meet your current obligations and pursue new projects while you wait for clients to pay.

There are many funding options to suit general contractors, but the right funding option depends on what you need it for and your business’s creditworthiness. This post will outline everything you need to know about getting a loan as a contractor, including common contractor loan and funding options.

Construction companies are often considered to be a riskier loan applicant because of seasonality, cash flow shortages, and volatility of demand. Here’s what you need to know before applying for a contractor loan for your construction company:

Depending on where you’re located and what type of construction you specialize in, seasonality can have a major impact on the stability of your cash flow. Weather-related delays can also affect your business’s bottom line and make it harder to access funding, especially if you’re seeking funding from a traditional lending institution like a bank or the Small Business Administration.

Certain types of alternative funding can help you shore up your cash flow in the off season, such as merchant cash advances and other funding options offered by direct online lenders like Greenbox Capital®. These lenders have more flexible approval requirements than banks or the SBA, making more funding available to businesses that would otherwise be rejected by traditional lenders.

The construction industry is well known for having long accounts receivable periods. Some general contractors don’t receive payment till as long as three months after a project is complete, which can make it very difficult for your business to take the next step forward after you complete a project. The extended length of these accounts receivable periods can have a significant impact on your cash flow, especially if you are responsible for paying subcontractors on top of your own staff and standard operating expenses.

Online invoice factoring, a form of asset purchase sometimes known as “accounts receivable financing”, can help bridge the gap between issuing an invoice and collecting payment. Essentially, a business will sell their unpaid invoices to a lender, called a “factor”. The factor then “owns” the invoice(s) and will advance you up to 90% of the invoice’s value. The remainder of the invoice’s value will be paid out to you once your client pays, minus any lender fees.

Because of factors like seasonal volatility and cash flow challenges caused by long accounts receivable periods, banks and the SBA often consider construction businesses to be higher risk, even if your business is well-established and has strong revenue.

If your construction business doesn’t meet the strict approval criteria of these lenders, an alternative online lender may be a better option. These lenders have more flexible approval requirements that focus more on the future potential of your business rather than just your financial history. They also offer more flexible and innovative funding options that might actually work better for your business, such as online invoice factoring or merchant cash advances.

Traditional lenders like banks or the SBA can take weeks or months to process your contractor loan application with no guarantee of approval. Waiting to hear back from these lenders can place even more strain on your cash flow, leading to more stress and missed opportunities for your business.

With a streamlined application and more flexible approval requirements, direct online lenders can approve and deposit funds in as little as one business day, which makes these lenders the ideal option for construction businesses that need fast funding.

On public or government-funded projects, general contractors are generally responsible for providing the payment bond.

The cost of a payment bond depends on a number of factors, such as the type of bond used and the total amount of the project. General contractors will be required to pay a specific percentage of the contract amount, referred to as the “premium”. The premium is based on your business’s financial stability, reputation, and credit records—good credit scores typically mean lower premiums, especially on smaller projects.

Getting a payment bond is similar to getting a loan. Though the criteria will differ slightly, sureties use similar underwriting processes to vet the general contractor, including evaluating their cash flow and their ability to pay subcontractors and other parties. Demonstrating strong cash flow may improve your ability to acquire the payment bond you need to win a major new project.

General contractors are responsible for ensuring that all parties below them on the payment chain get paid, including subcontractors, laborers, and materials suppliers. This means there are more demands on the general contractor’s cash flow than there are on other parties involved in a construction project.

Sometimes, you’ll have to pay subcontractors, sub-sub contractors, materials suppliers, or even materials suppliers for your subcontractors or sub-subcontractors, before you get paid by your client. On top of this, collecting waivers from subcontractors, sub-subcontractors, and suppliers is often a long, manual process that can take weeks on large projects, placing even more strain on your cash flow while you wait for the project owner to pay.

Invoice factoring and other alternative small business loans can provide the cash flow your business needs to meet your financial obligations or get ready for your next project while you wait for clients to pay.

The specific application requirements for a general contractor loan will depend on the lender you are working with and what type of funding you are seeking. Typically, you will need to supply the following documents at a minimum:

• Bank statements: Bank statements provide a snapshot of your business’s general cash flow. Your lender may request bank statements for as few as 3 months or up to a year or more.
• Tax returns: You may need to provide recent business and personal tax returns, especially if you’re applying for funding from the SBA and traditional lenders.
• Credit history: You’ll need to supply a credit report for your business, and possibly a personal credit report as well.
• Age of business: All lenders have minimum requirements for time in business, but these requirements vary by lender. Alternative online lenders may require a minimum of 6 months of operations, while the SBA requires a minimum of 2 years.
• Collateral: The SBA and most loans from traditional lenders will require collateral, while alternative lenders typically do not require collateral.

The Small Business Administration and traditional lenders have the strictest approval requirements, and will require more documentation than is listed above.

There are multiple types of funding available from both traditional and alternative lenders to help construction businesses and general contractors maintain their cash flow and continue to grow. Here’s a quick overview of 6 of the most popular funding options for general contractors:

1. Term loans: With a traditional term loan, you’ll receive a set amount of cash up front and the loan will be repaid in predetermined installments over a set (usually monthly) schedule. Term loans typically require collateral or a personal guarantee.
2. SBA loans: The Small Business Administration primarily offers term loans, typically with lower rates and longer terms than other traditional lending institutions. SBA loans are the hardest to acquire, with strict approval requirements and long application periods that can stretch into weeks or months with no guarantee of approval. Collateral is often required and most applicants are rejected, even with strong financial histories.
3. Equipment financing: Equipment financing is designed to fund the purchase of specific equipment, such as heavy machinery or new computers, allowing you to maintain your working capital for other expenses. The equipment acts as collateral and the financing can only be used to purchase the equipment for which the loan is being granted.
4. Business line of credit: With a line of credit, you can draw and repay from the line as needed, and you’ll only ever pay interest on the amount you borrow. This makes business lines of credit a flexible financing option for when you know you’ll need extra working capital, but aren’t sure how much you’ll need.
5. Invoice financing: Invoice factoring is a practical way to even out your cash flow while you wait for project owners to pay their invoice. This form of funding involves selling your outstanding invoices to a factoring company in exchange for 80-90% of the invoice’s value up front. The remainder is paid to you (minus any lender fees) when the project owner pays.
6. Merchant cash advance: A merchant cash advance is not actually a loan—it’s technically a purchase of future receivables. You’ll receive a cash advance up front in exchange for a portion of your daily or weekly debit or credit card sales until the advance has been repaid. Your business must accept credit cards to qualify, so merchant cash advances are typically ideal for general contractors or construction businesses that accept payment directly from customers via credit card, and may not be well-suited for contractors who are overseeing a major construction project.

The right general contractor loan for your construction business depends on what you need the funding for and your business’s financial history. As an alternative lender, Greenbox Capital can approve more loans for general contractors than other lenders. We can also approve your contractor loan faster, with funds deposited in as little as 24 hours.

Read our Essential Guide to Construction Company Funding to learn more about your funding options and discover which funding is best for your business.