Major construction projects need significant funding to get off the ground. It requires equipment loans, crew wages, and insurance, to name a few.
Using construction business loans keeps cash within the company and preserves cash flow. There is a wide range of financing options for contractors to get started.
How do you fund your construction project? Here are five common sources of construction financing.
1. Financing Through Client Purchase Order
Purchase order financing is a popular way to fund large orders in contracting and supply projects. It can also be used to acquire materials for your residential construction project.
The contractor must obtain and forward a purchase order from its supplier to the lender. Lenders examine the contractor’s client’s credit history before approving financing.
2. Financing Using Business Credit Lines
Businesses with approved business lines of credit have a ready source of funds to draw on if they run into cash flow issues. Borrowing will deduct the amount from the total credit line while still receiving funds for future use by the business.
When you repay your loan, the money is returned to your account.
3. Financing Using Receivables
Construction firms rarely deal in cash and negotiate terms and conditions with their clients. The government pays the contractor within 30 days of the project’s start date for government contracts. Succeeding payments come every month after that until completion.
Accounts receivable can assist in filling the need to start the project. This will keep cash flowing for the contractor.
The invoices serve as collateral for the loan because they represent potential revenue that has yet to be realized.
4. Contract Financing
Contracts are assurances between two parties that they will fulfill both ends of the bargain. A contract ensures the lender that the borrower will have a consistent revenue stream to support its financial obligations.
This document contains all project information, including projected costs and revenues. Because the financing can only cover a certain percentage of the total contract, lenders can quickly determine how much the applicant can borrow.
Contract financing is used to fund a construction project’s startup costs. It can also be used to guarantee labor force salaries for the duration of the contract. In some cases, contractors will use these funds to purchase new equipment for the project.
5. Financing Using Loans
Loans are a type of alternative financing that requires you to pledge a percentage of your future earnings as repayment for the debt. Construction contractors can benefit from this.
A contract guarantees them a consistent income stream for the duration of the contract. Contracts are documents showing the total contract value and the monthly amount the contractor invoices its client.
This assists lenders in determining the borrower’s creditworthiness. It also shows the eligibility of borrowers for this type of financing. The document simplifies the entire process for the lender.
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Here’s How to Fund Your Construction Project
There are various types of financing available for your construction project. Contractors can use their client contract to have lender finance the project.
Contractors can also seek loans against future earnings through accounts receivable financing, a revenue-based loan. In a financial crisis, the company’s cash reserves remain accessible.
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