As a contractor, you know that running your business requires capital—and, often, lots of different kinds. Luckily, the best small business loans for contractors provide you with many options to access different types of capital, depending on your company’s unique needs.
You may need capital to finance the purchase of specific items, assist with cash flow concerns, or pay your staff. Or, you may need general, flexible working capital to potentially accomplish all of these things and more. The different types of business loans for contractors are able to help with these concerns in both straightforward and creative ways alike. (And remember: You don’t have to be in financial trouble to access capital—many savvy business owners take advantage of financing to bring their companies to the next level.)
We’ll discuss the different options for business loans for contractors, help you figure out which is your best fit, and go over some additional info you need to know before submitting your application.
There are many different types of small business loans for contractors, and you’ll want to choose the best type depending on both of your capital needs and creditworthiness. Here, we’ll review these loan options, which provide an excellent variety of uses for contractors:
We’ll go through all of the options here so you can figure out which is best for you. Among the things you’ll want to keep in mind is how quickly you’ll need the capital, how flexible you want the loan to be, how much collateral you are willing to put down, and how long you’ll need to repay the 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.
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.
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.
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.
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.
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.
Now that you’re familiar with the best small business loans for contractors, let’s go through a few additional things. First and foremost, you want to make sure that you’re presenting the best picture of your finances possible to a lender.
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!
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.
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.
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.
Applying for a loan requires a lot of documentation. Different loans require different types of documentation, so you’ll want to check in specifically with your lender about what you need. With that in mind, though, there are a few business and financial documents you’ll want to gather ahead of time to make the application process as smooth as possible.
Lenders will let you know if there’s any additional information needed—and there certainly will be if you have your eye on an SBA loan—but pulling some info in advance will show that you’re ready to get the ball rolling, and help avoid delays if you’re in a crunch for cash.
Navigating the world of small business loans for contractors can be a little nervy, sure. Hopefully, however, you’re pleased to see the vast number of options that can suit your business, regardless of your needs. And remember—you don’t have to be in a disadvantageous position to look for a loan. You may just find that the loan you take on can help you with any pressing concerns as well as open up doors for more success in the future.
Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.