Finding the right business loans for construction projects can be confusing, with so many choices and requirements to meet. This guide provides the information you need to help you feel confident about getting the financing you need to grow your construction business.
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What are the types of business loans for construction trades?
Business loans for construction trades cater to the unique needs of contractors, builders and construction businesses, offering various tailored options to address their financial requirements. Below are the primary types of business loans for construction trades.
Equipment financing
Equipment financing is vital for construction businesses looking to purchase or lease heavy machinery, tools and vehicles. These loans allow businesses to spread out the cost of expensive equipment over time, with the equipment itself serving as collateral, often resulting in lower interest rates and predictable monthly payments. RBC and TD are some examples of financial institutions that offer specialized equipment financing solutions.
Working capital loans
Another popular option for construction businesses is working capital loans, which address cash flow gaps. These loans cover day-to-day expenses like payroll, materials and utilities, offering short-term financing with flexible terms. Working capital loans can be secured or unsecured and can be classified as demand loans — meaning the lender may demand repayment in full at any time.
Business line of credit
A business line of credit offers construction companies the flexibility to manage ongoing or unexpected costs. This type of financing works as revolving credit, allowing businesses to withdraw only the funds they need and pay interest solely on the amount used. This type of lending can be useful for handling fluctuating expenses or emergencies. Lenders such as CIBC and BMO provide competitive options for a business line of credit.
Construction loans
Specifically designed to fund building projects, construction loans are a go-to option for contractors working on residential homes or commercial properties. These short-term loans provide funds in stages as the project progresses, ensuring businesses only pay interest on the amount disbursed.
What type of loan is best for construction?
The best loan for construction depends on whether you are financing a specific project or addressing the broader needs of a construction business.
For contractors and builders managing individual projects, construction loans are the most suitable option. These loans provide short-term funding disbursed in stages to ensure cash flow aligns with project progress. With interest accruing only on disbursed amounts, construction loans are ideal for large-scale residential or commercial developments.
For construction businesses as a whole, the right loan depends on the business’s unique needs. If you are purchasing heavy machinery or tools, equipment financing allows you to spread the cost over time. Meanwhile, businesses experiencing seasonal fluctuations or needing to cover day-to-day expenses may benefit from working capital loans or a business line of credit. These options provide flexibility to manage operational costs or unexpected expenses.
By assessing whether your needs are project-specific or operational, you can identify the loan type that best supports your goals.
What are the interest rates of construction business loans?
The average rate of business loans is 5.73%, according to Statistics Canada. Interest rates for construction business loans in Canada have a wide range, depending on several factors. The type of loan plays a significant role — secured loans like equipment financing often have lower rates, while unsecured options such as working capital loans tend to carry higher rates due to increased risk for lenders. Other factors that influence rates include the borrower’s creditworthiness, the financial health of the business, the collateral provided, the payment terms and market conditions, such as changes to the prime rate.
To find the best loan for your construction business, it’s crucial to consider more than just the interest rate. Evaluate the total cost of the loan, including fees and repayment terms, and compare offers from multiple lenders to ensure the financing aligns with your financial goals. Ultimately, the rate you qualify for will depend on your unique circumstances, so it’s important to prepare for a potentially broad range during your application process.
Where can you get a construction business loan?
Construction businesses in Canada have access to a variety of lenders and financing options, each catering to different needs. Here are the main sources for securing a loan:
Traditional banks in Canada
Major banks like TD Canada and Scotiabank offer competitive interest rates and tailored financing solutions for construction businesses. TD offers business lines of credit and term loans and Scotiabank specializes in equipment financing and credit lines.
Credit unions
Credit unions are member-owned financial institutions supporting local businesses with flexible terms and competitive rates. For example, Desjardins offers operating lines of credit and other types of financing for local businesses in select Canadian provinces. Vancity is another example that provides loans and lines of credit for equipment purchases and business growth.
Government-backed loans
Government programs like the Canada Small Business Financing Program (CSBFP) and loans from the Business Development Bank of Canada (BDC) also offer small business loans. The CSBFP provides up to $1 million in loans for purchasing equipment or improving property, while the BDC focuses on working capital loans as well as equipment financing.
Online lenders in Canada
If speed and flexibility are priorities, online lenders like Journey Capital provide quick approvals and less stringent credit requirements. Journey Capital offers flexible funding solutions specifically for contractors and construction businesses in need of fast access to capital.
Equipment financing companies
For contractors who need machinery without significant upfront costs, equipment financing companies such as Caterpillar Financial Services Canada and John Deere Financial Canada provide loans or leases to help you acquire the tools required for your projects.
Steps to get a construction business loan
Getting a construction business loan involves several key steps to ensure you meet the lender’s requirements and secure the necessary funding. Here’s a step-by-step guide:
1. Determine your loan purpose
Identify why you need the loan — whether it’s for equipment purchases, project funding or working capital. Choose a loan type that aligns with your needs, such as equipment financing, construction loans or working capital loans.
2. Prepare a business plan
Lenders will often ask for a detailed business plan that outlines your company’s background, project pipeline and how you plan to use the loan. Include realistic revenue projections and a clear repayment strategy.
3. Gather required documents
Collect the documentation lenders will request, such as business tax returns, financial statements (income statement, balance sheet, cash flow) and legal permits.
4. Research lenders
Explore options with banks, credit unions and alternative lenders. Compare interest rates, loan terms and qualification requirements to find a lender that aligns with your business’s goals.
5. Submit a loan application
Complete the lender’s application process, providing all necessary documentation. Be ready to provide information about your business’s financial history and business plan.
6. Undergo the approval process
After submitting your application, lenders will review it and make a decision. Processing times can range from 24 hours to several weeks, depending on the lender and the complexity of your application.
7. Review loan offer and accept
Carefully compare your offer’s interest rates, repayment terms and fees to determine if it fits your business needs. If you decide to move forward, formally accept the offer by signing the loan agreement and completing any final documentation required by the lender.
8. Use funds and repay
Allocate the loan proceeds as outlined in your business plan, keeping accurate records of expenditures. Make timely repayments to maintain a positive relationship with the lender and strengthen your business’s financial standing.
Can you get a construction business loan with bad credit?
Yes, it’s possible to obtain a construction business loan with bad credit, but approval will depend on the specific criteria of each lender. Generally, a strong credit score—typically over 660 as defined by credit bureaus like Equifax—is necessary to demonstrate creditworthiness. If your credit score is below this, you may want to rebuild it before applying for a loan. Also, lenders will consider other factors such as your business history, financial stability, and available collateral when evaluating your application.
What are the typical eligibility requirements?
Eligibility requirements for construction business loans in Canada vary by lender and loan type but commonly include the following:
- Credit score. Traditional lenders typically require a minimum credit score of 660. Alternative lenders may accept lower scores, sometimes around 500.
- Business revenue. Lenders often expect a minimum annual revenue which can vary depending on the lender and loan type.
- Time in business. Many lenders prefer businesses with at least six months to two years of operational history.
- Collateral. Some loans require collateral, such as equipment or real estate to secure the loan.
- Business plan. A detailed business plan outlining how the loan will be used and repaid is often necessary to demonstrate the viability of the business.
- Financial documents. Lenders typically require recent tax returns, profit and loss statements, balance sheets and cash flow statements to assess financial health.
Meeting these requirements can enhance your chances of securing a business loan for your construction business. It’s recommended to consult directly with potential lenders to understand their specific criteria and prepare your application accordingly.
What are considered construction trades?
Construction trades in Canada encompass a diverse range of specialized occupations essential to building, renovating and maintaining structures. These trades include carpenters, electricians, plumbers, masons, HVAC technicians, and heavy equipment operators, each requiring specific skills, certifications and training to meet industry standards and regulations. Depending on their specific roles and the nature of their projects, construction businesses may require different types of funding.
Bottom line
Construction businesses and tradespeople have access to various tailored financing options to meet their unique needs, whether for managing cash flow, purchasing equipment or funding specific projects. Understanding the types of loans and their eligibility requirements ensures contractors and tradespeople can find the right financial solution for their business needs.
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