The 6 Best Business Loans for Contractors

Why Contractors Need Financing

If you run a contracting company, you might need a loan or financing for any number of reasons:

• Your budget projections show you’re running short on cash flow while you’re waiting for money from your next project to come in
• Your equipment requires replacement or repair
• You need to hire staff
• You have to pay suppliers

Many companies wait until they’re short on money to consider financing. However, you can take a more prudent approach of anticipating budget problems and proactively seeking financing to stay fiscally sound.

How to Get a Loan as an Independent Contractor

Getting a loan as a contractor typically requires you to provide certain information and documentation to lenders. The SBA has strict documentation requirements, and most traditional lenders have similar policies. Non-traditional lenders, however, might have more relaxed qualifications.

For contractors, loan providers will typically require:

• A business plan demonstrating that you have a profitable business model
• Business financial statements showing your ability to repay your loan, including:
• Profit and loss statements (income statement)
• Balance sheets
• Cash-flow statements
• Several months of recent bank statements verifying your company’s income
• Income tax returns
• Documents for existing loan obligations or leases
• Your business credit score
• Personal financial information, including your personal credit score
• Personal identification, such as a driver’s license
• Verification of your business ownership, such as a business license or articles of incorporation

Providers of non-loan forms of financing could request some or all of this information as well.

Types of Small Business Loans for Contractors

Financing resources for contractors include the following loans and other options:

1. SBA Loans

SBA loans are from lenders backed by the Small Business Administration. SBA backing reduces risk to lenders, enabling them to extend credit at lower rates than they would otherwise. SBA lenders cannot exceed certain maximum rates set by the Small Business Administration, making this one of the most affordable options for small businesses.

The SBA loan program includes a number of different loan types. The most popular SBA loan is a Standard 7(a) loan. A Standard 7(a) loan can be used for working capital involved in paying for day-to-day operations, such as paying staff and buying materials, making it useful for contractors. Businesses can borrow up to $5 million under a 7(a) loan.

• The 7(a) program also includes other types of financing. Some of the most relevant to lenders include:

  • SBA 7(a) Small Loans for up to $350,000
  • SBA 7(a) Express Loans for up to $350,000, which are processed more quickly than regular loans but receive less backing from the SBA, translating into higher rates
  • SBA 7(a) CAPLines, which are lines of credit designed to help meet short-term or periodic working capital needs

To qualify for a 7(a) loan, you’ll need to be a for-profit business based in the U.S. or its territories. You must have first pursued other financing options, including using personal assets, before seeking assistance. You’ll need to provide a personal financial statement dated within 90 days of your loan application submission, along with 3 years of business financial statements. You must have reasonable owner equity to invest. Your lender may require additional qualifications in addition to the SBA’s minimum requirements.

2. Term Loans

Term loans for independent contractors are also available outside the SBA network from traditional lenders such as banks and non-traditional lenders such as online financing services. You’ll need to explore these options before you can qualify for an SBA loan.

Non-SBA loans from traditional lenders usually feature higher rates than SBA loans, but lower rates than alternative lenders. To qualify for a loan from a traditional lender, you’ll normally need to submit paperwork similar to what you’d need for an SBA loan. You’ll also have to have a good credit score, though qualifications will vary by lender.

Alternative lenders generally have more relaxed qualifications than traditional lenders, along with quicker turnaround times on approval. This represents a higher risk for the lender, so alternative lenders tend to charge higher rates. Qualifications for loans from non-traditional lenders widely vary. Some have minimal qualifications, focusing on your revenue rather than your credit score, with no requirement to submit financial paperwork other than bank statements. Others have credit score minimums and require you to submit financial statements just as you would for traditional loans.

3. Business Lines of Credit

Alternatives to loans available to independent contractors include business lines of credit, which are similar to credit cards but with some differences. Like a credit card, a business line of credit gives you access to funds up to a set limit. The limit is usually higher than that on a credit card. Business lines of credit can be secured by collateral or unsecured; accounts secured by real estate or inventory typically have higher limits.

You can spend within your limit as long as you continue making repayments on time. Money you withdraw goes into your bank account, so you can use it to write checks, enabling you to use a business line of credit to pay vendors who won’t accept credit cards.

You must pay interest on any portion of your credit line you spend. When you pay money into your account, the money becomes available for you to spend again, so this type of financing is sometimes called a revolving line of credit.

Requirements for business lines of credit are similar to those for loans. Traditional lenders generally have stricter requirements, higher limits and lower interest rates than non-traditional lenders.

4. Business Credit Cards

Business credit cards represent another option for contractors. Like lines of credit, business credit cards have a set limit, but it’s usually lower. They can be secured or unsecured.

You can spend up to your limit as long as you make payments on schedule. After you make a payment, the money becomes available for you to spend again, up to your limit.

Business credit cards often come with rewards to encourage spending. For instance, you might get a discount for buying office supplies.

When evaluating whether you qualify for a business credit card, financial providers might consider factors including your personal and business credit score, your business revenue and expenses and your personal income. You can obtain a secured card with a low limit even if you don’t have a high credit score, which can be a way to start improving your score. A higher score, higher revenue and collateral can qualify you for a higher limit.

5. Equipment Financing

Equipment financing can be especially attractive to contractors who depend on heavy machinery or other physical equipment. It works similarly to a loan, with funds borrowed specifically for equipment leasing or purchasing. Because the money is going toward physical equipment, the equipment itself can serve as collateral, making it easier to qualify for this type of financing.

Equipment financing can come in several forms. With a fair market value (FMV) lease, the borrowers can use the equipment for a designated period of time, and at the end of the lease, they have the option to purchase the equipment for its fair market value, return it or upgrade it. An FMV lease can work well for technology equipment that quickly becomes obsolete, such as computers.

With a $1 buyout lease with a purchase option, also known as a capital lease, you pay a higher monthly rate on your lease, with the intention of purchasing the equipment at the end of your lease for a nominal fee. This type of lease works well for equipment intended for long-term use, such as construction equipment.

6. Invoice Financing

Invoice financing appeals to contractors who have high volumes of unpaid accounts receivable due from customers. With this type of financing, your lender buys your unpaid invoices from you for a percentage of their value. You can then spend the money while your provider collects the money from your customers. After they collect the money, they pay part of it back to you, minus a fee for their services.

With your unpaid invoices effectively serving as collateral, it can be easier to qualify for this type of financing. However, interest rates can be higher than traditional financing options.

Improving Your Odds of Getting a Loan

You can improve your chances of securing financing by taking steps to optimize the information you provide lenders:

• Write a sound business plan following best practices
• Hire a business accountant to create your financial statements and recommend financial management strategies
• Use cost-cutting strategies, such as automation and outsourcing, to improve your profit projections
• Keep your business bank and credit card accounts separate from your personal financial accounts
• Pay suppliers on time, which will improve your business credit score
• Improve your personal credit score by keeping balances low and paying bills on time

Not all forms of financing will require all of these steps. But whether you’re seeking a loan or another form of financing, taking these steps before approaching financial providers will place you in a better position to submit a successful application.

Get Financing for Your Contracting Business

The wide range of loan types available for contractors can help you find financing no matter what your needs, even if you don’t qualify for a traditional loan. Fast Capital 360 offers many types of business financing for contractors, including SBA loans, term loans, lines of credit, equipment financing and accounts receivable financing. Check out our line of business loan products to learn more about what type of financing is right for your contracting business.