Business Loans for Contractors: The Top Options

How to Get a Business Loan as a Contractor

• Best Working Capital Loan for Contractors: SBA 7(a) Loan

  If you need general working capital to spend on lots of different types of expenses, the first place you should look is to SBA loans. Particularly, SBA 7(a) loans, which are the most popular of all of the SBA loans.

  These loans are the most desirable of all small business loans due to their long repayment periods and low interest rates—they’re as competitive as it gets. Lenders, often small banks, get their loans guaranteed up to 85% by the U.S. Small Business Administration, which means that they have security for a significant portion of the loan in case a borrower defaults. That’s why they’re able to offer such favorable rates.

  With an SBA loan, you can access up to several million dollars of capital. The catch? These loans only go to the most creditworthy of candidates, since they are so competitive. If you’ve had a minimum of a few years in business under your belt, with strong revenues (profitability not a must), and a strong credit history, you may be a candidate for these loans.

  It’s important to note that SBA loans don’t provide a quick-access avenue to capital. These loans are very paperwork intensive, and can take a few months to gain approval. But if you have the time to wait, and the credentials to get approved, they’re well worth it.

• Best SBA Loan Alternative for Contractors: Term Loan

  An SBA loan a little too far out of reach? Or can’t wait quite that long to get your hands on your working capital? That’s entirely understandable; lots of business owners are in your shoes, too.

  In that case, you might want to consider a term loan. They’re similar to SBA 7(a) loans, in that you’re provided with a lump sum of capital and a finite period over which to repay it, but lenders don’t require quite as strict a credit history to qualify. Yes, this may mean that the interest rates are a bit higher, but if you need a lump-sum, “traditional” business loan—and fast—you may find that a term loan could very much be a strong option for you.

• Best Contractor Loan for Supplemental Purchases: Business Line of Credit

  A business line of credit can be a contractor’s best friend.

  This type of small business loan enables you to “draw” from a sum for which a lender approves you, but you only have to pay interest on the amount that you use. You can think of it as a hybrid of a traditional loan and a credit card cash advance. You can continue to draw up to your approved line of credit, and once you pay it back, most of these loans are what’s called “revolving,” which means that they re-up and you’re able to draw against them again.

  These loans are great for incremental purchases and cash flow issues, but also if you need to triage an emergency and need fast access to cash. Similarly, if there’s an opportunity you need to seize, and you want to quickly access capital, a business line of credit can provide you that option.

  You may be able to gain approval for a business line of credit quickly.

• Best Contractor Loan for Everyday Expenses: Business Credit Card

  You may be surprised to find out that a business credit card can actually be a very powerful resource. If you need to make purchases on a short-term basis, you likely know that a business credit card is the tool that most use.

  But did you know about 0% intro APR business credit cards? These cards provide an introductory, interest-free period for a certain period of time—often a year or more. That means you can use them as a 0% “loan,” so to speak, to make your purchases. The best part here is that you can plan to pay back your purchases over time without that extra interest accruing. (Just make sure you do pay it back before the regular interest period kicks in.)

  Another big bonus of spending on any type of business credit card is that if you pay in full and on time, you’ll be building your company’s credit history. And the stronger your credit history, the more options open for you down the line for contractor business loans—including the potential for an SBA loan.

• Best Loan for Contractors to Finance Gear: Equipment Financing

  If you’re looking to only finance equipment—anything as large as heavy machinery, to as small as computers—you might be well suited for an equipment loan.

  With this type of business loan for contractors, you receive a quote for the gear you’d like to purchase, and, if you’re approved for the loan, a lender will finance you a significant portion of the price tag to make the purchase. This makes accessing large purchases substantially easier, giving you access to big-ticket items you may have thought were out of reach.

  Although equipment financing isn’t flexible like other working capital loans, one thing you may like is that these loans generally don’t require collateral—since the equipment you’re financing serves as the collateral for the loan. Especially if you’re just gearing up your contracting business, this could be a major help to secure financing and provide you peace of mind.

• Best Contractor Loan for Cash Flow: Invoice Financing

  Finally, a common problem that many contractors run into is cash flow. Having a strong cash flow margin is essential to your business succeeding, and if you have outstanding invoices that you’re waiting on, that can be a problem. You may not be able to pay your staff, purchase the supplies you need to kick off your next job, etc.

  With invoice financing, a lender will front you a significant portion (usually 85%) of the invoice that’s outstanding, and when your client finally pays you and you forward on the cash, the lender gives you the outstanding 15% minus fees. It’s not super cheap, no, but for many businesses big and small, invoice financing is worth the fees in the long run to be able to keep running business as usual. What’s worse is losing staff or jobs entirely because you don’t have the liquidity to finance them.

• 1. Know how much money you’re going to ask for—and don’t ask for too much.

  Just because you may have access to a small business loan doesn’t mean you should ask for more than you need—or, certainly, more than you can afford. You’ll actually heighten your odds of approval if you ask for the amount of money that you need and know you can pay off, since your lender will get a sense from your financial documentation whether you can afford what you’re borrowing. Don’t begin on the wrong foot!

• 2. Understand the limitations and costs of your loan.

  As we mentioned, some loans are more flexible than others; some are faster than others; some are less expensive than others. You’ll end up paying a premium for speed and flexibility. Before you sign off on a loan, make sure you understand the costs involved, including things such as APR and factor fee.

• 3. Take special considerations if you’re a seasonal contracting business.

  Seasonal contractors need to be aware of how their off-season finances present to a lender. If you’re showing bank statements from the off-season to a potential lender that are lower due to your seasonality, you aren’t presenting the best picture of your business—and they may think you can’t pay off a loan.

  Although it may sound counterintuitive since you’ll have the most money in the bank, you will want to apply for a loan at the tail end of your peak season so you can show a lender how strong your business has been throughout the past several months, and get the cash you need to carry you through the low season.

• 4. Don’t stack loans.

  If you already have a loan, stop. You don’t want to get into a situation called “stacking loans,” which means taking out more than one loan at once. In a few cases, this is allowed (for instance, having a business line of credit with a term loan), but it’s totally up to the original lender you’ve signed with. If you stack loans against their rules, you could automatically default on your first loan. Check in with your lender before taking on another loan.