Sooner or later, most construction firms need financing for an expansion, new equipment or a new facility. The process of approaching a lender can be daunting, but with a few well-planned steps, you can boost your chances of successfully finding the money you need.
Lenders generally follow a rigid process of assessing applicants, their companies and their current finances. Typically, lenders look for the same things. The closer you meet their expectations, the more likely you’ll walk away with the money.
So, before you approach a commercial bank, government agency or credit union, be prepared to persuade the lending officer that you represent a reasonable risk. Have these documents available:
1. A business plan that includes:
- An industry overview of trends and estimated sales in the sector. Describe your company’s place within the industry, the competition and how you plan to meet it.
- An operating plan that outlines your location, current employees and required staffing, facilities, equipment, and current and necessary inventory.
- A market evaluation that assesses the extent of demand for your products or services – and how you plan to meet it. Outline strategies for sales, pricing, advertising and promotion.
- Management structure, including legal, management resources and personnel needs.
- A financial plan that elaborates on your borrowing requirements. Include your financial status and list personal assets and liabilities.
2. Cash flow projections that indicate how you’ll be able to repay the loan. Cash flow is a major tool that lenders use to assess risk and is likely to be one of the first questions they ask.
3: Business tax returns, which may not be required, but give a good idea of how your business is doing.
It isn’t necessary to bring a credit rating report, because it’s easy for the lender to check. However, be sure you have established a rating. Your repayment history will be used to assess your risk so check your credit report before applying.
The lender may not take a thorough look at these documents while you are there. But you generally have to answer these key questions during the interview:
How will you use the money? Be completely familiar with the details of your business plan and indicate the relevant information that shows how much you need, why you need it, and how you will spend it.
How do you evaluate your risk potential? Explain how much you are personally willing to invest in the business or expansion. And describe the collateral that can be used to secure the loan. These assets include equipment, property and automobiles. What kind of experience do you have? Be prepared to answer questions about your background, expertise, and goals.
Clean House: Before applying for a small business loan, make sure your personal financial house is in order. Think of the process as a presentation for an important customer. Getting a loan, like winning business from customers, depends on how you present yourself.
Common Business Loans
Short- and long-term commercial loans offer a set amount of money borrowed for a specific amount of time, paid back with interest on the lump sum.
Credit lines represent cash you can draw from the bank when needed. They are usually renewable after a review by the lender and carry floating interest rates that are paid only on the outstanding balance.
Revolving credit charge cards are an alternative to credit lines but are expensive, with interest rates just below consumer card rates. Lending limits average $15,000.
Types of Security
- Secured loans require collateral, or property that can be seized and sold to pay off the loan if you default.
- Unsecured loans don’t require collateral, but likely require a solid, established credit history. If you default, the creditor has no claim against property, but can take you to court.
- Long-Term Debt: The repayment period is longer than three years and the money is usually spent on plant, facilities, equipment or real estate. These are usually secured loans.
- Short-Term Debt: Repayment is usually one to three years and the money is often used for inventory and working capital.