9 Contractor Financing Options to Improve Cash Flow

In the current landscape, adjusting bids to balance rising costs while staying competitive is more challenging than ever. According to a study by Billd, 57% of subcontractors saw their profits shrink in 2022 because of high material and labor costs fundamental to construction expenses. And a massive 87% of contractors paid out of pocket for labor expenses before receiving payment for their work.

Contractor financing gives businesses like yours the option to not only improve cash flow, but to to take on projects you might not have been able to without the injection of funds.

We’ve partnered with Billd, who can provide access to same-day cash advances for materials and labor. Just enroll with Billd, finance materials or receivables, and receive a $1,250 rebate on your next BigRentz rental.

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In this post, we go over nine contractor financing options to help you make the most of your bids and gain control of your finances.

Common Obstacles Contractors Face

It’s tough for contractors to take out traditional business loans, especially since work, timelines, and pay days are unpredictable. As a result, more and more contractors are turning to modern contractor financing options like Billd, a financial service for contractors that offers project-based lines of credit and same day construction advances.

If you’re having a difficult time getting financing, you’re not alone. Contractors face a lot of obstacles in trying to secure loans or other resources. Here are just a few examples:

• Lack of financing options with flexible terms: Most loan types aren’t flexible enough for contractors and subcontractors. The lack of flexible credit terms can make it harder for you to do business—something 41% of contractors face in dealing with their suppliers.
• Interest rates: Financing often involves high interest rates, which increase costs and cut into your profitability.
• Loan approval and application processes: It’s not always straightforward for contractors to establish credit history, especially if you’re just starting out. This makes it difficult to get approved for loans or other financial help. And depending on the loan, the application itself can be a barrier, since some are pretty complicated and lengthy.
• Unpredictable cash flow: Contractors often deal with delayed payments due to client, project, or supply chain issues, making it tricky to manage cash flow.
• Payment timing: Similarly, payment timing might be an issue. Subcontractors might wait as many as 74 days before getting paid back for project costs they fronted. The gap between purchasing materials and receiving payment can contribute to cash flow issues and make it difficult to meet repayment terms, which are often 30 days or less.
• High upfront costs: Construction materials are expensive, and it’s hard to take on big upfront costs, especially if you’re a new or small business.

Financing Options for Contractors

Just because your financial situation is unique doesn’t mean you don’t have financing options. Here’s an overview of some of the best financing options for contractors. We’ll delve into each one in more detail below.

Remember, the cost of each financing option will vary by lender and your creditworthiness, so it’s beneficial to shop around and weigh multiple options.

1. Invoice Factoring

Invoice factoring, the factor being the financial institution, involves the factor purchasing your unpaid invoices at a lower rate. The factoring company pays you an advance rate, and then the remainder, minus fees, once the invoice is paid. This provides you with immediate cash flow, necessary for covering expenses like payroll and material costs. The factor then collects payment directly from the client when the invoice is due.

There are two types of rates involved in invoice factoring: flat rates and tiered rates. Flat rates apply a single, fixed percentage to invoices regardless of how long it takes for them to be paid. Tiered rates vary based on the payment duration, depending on how quickly the client pays the invoice.

Invoice factoring can be a great option for you if you need to manage your cash flow and grow your business, but you should weigh the costs and impact on client relationships.

Pros

• You’ll receive a portion of funds immediately to help manage cash flow gaps due to any delayed payments.
• You don’t need collateral.
• You can take on more or larger projects because of the immediate funds.
• Your client’s creditworthiness is evaluated, not yours.

Cons

• Fees may be higher than traditional financing options.
• You depend on your clients to repay the invoice.
• The factor is involved in collecting from the client, which may impact relationships.
• You may need a minimum amount of monthly revenue to get the factor on board.

2. Materials Financing

Billd is a financial service designed for contractors. It provides an option where you don’t have to pay upfront for materials. Instead, Billd pays the supplier upfront, and you pay Billd when you get paid for the project, up to 120 days.

You can use material financing for construction equipment, materials, and rental equipment.

Pros

• You have instant access to cash buying power.
• You protect your working capital.
• You can start more projects and bid on more jobs knowing you can afford to fund them.
• You can pay for the materials over time and after you are paid, up to 120 days.

Cons

• The longer you take to pay off the material purchase, the more weekly interest payments you accrue, increasing the overall cost.

3. Revenue-Based Loans

Revenue-based financing gives you, or your construction business, upfront working capital up to a certain amount. Repayment terms are usually based on a monthly percentage of your business’s revenue up to your repayment cap, which is typically 1.5 times to 3 times the loan amount. This means repayment on revenue-based loans is typically more flexible and aligned with your company’s actual income flow.

This option offers a flexible and accessible financing option for you, especially those with less-than-perfect credit. However, the cost of the loan can be extremely expensive, so make sure it’s the right fit for your revenue and business model.

Pros

• Your credit score isn’t the primary deciding factor for whether you’d get the loan, but rather the revenue of the business and its growth potential is considered.
• Repayment is based on a percentage of your revenue, so it should be more manageable during periods of lower income.
• The quick funding and application process makes it easy to get those funds working within a few days, which is perfect for the construction industry.
• You don’t need collateral.

Cons

• Startups or new businesses may struggle to get this financing since revenue determines the financial backing.
• This option typically costs more than traditional bank loans.
• Paying the lender a percentage of your revenue each month cuts into your cash on hand for business expenditures.

4. SBA Loans

The Small Business Administration (SBA) is a federal agency that supports small business development. This organization supports small businesses through loans, and it also sets guidelines on its loans to guarantee a portion of them, reducing risks for lenders.

The SBA offers multiple loan programs to choose from, catering to various financing needs. It can be a good option with a range of benefits, like capped interest rates and broad eligibility requirements. There are downsides, however, like having to put up collateral, make down payments, and deal with a potentially slow approval process.

Pros

• Interest rates are capped.
• A large range of loan amounts is offered.
• Eligibility requirements are broad making it easy for construction contractors to quickly apply.

Cons

• A down payment may be required, which may put a halt to cash flow.
• The approval process can be slow, making it difficult to quickly access necessary funds for equipment and materials.
• You need to have good credit.

5. Equipment Financing

Equipment financing is a loan option offered by banks so businesses can purchase necessary equipment. Similar to an auto loan, equipment financing allows you to buy equipment through multiple installments paid over time. You could even get a loan to cover the equipment cost initially and end up owning the equipment once the repayment term is up.

Equipment financing for construction projects can be a lifeline for you, allowing you to purchase or lease equipment and manage cash flow to fulfill contractual obligations. You can preserve your cash reserves and stretch out payment terms, all while ensuring you still have the resources you need to successfully complete your projects.

Pros

• You can acquire necessary equipment and spread payments over time.
• You’ll have working capital for other aspects of that project as well as other projects.
• Various repayment term lengths and options can suit your needs.

Cons

• Your creditworthiness, or that of your business, is typically considered in the approval process.
• You’re obligated to a recurring payment over time that must be made whether you have clients paying their invoices (cash flow) or not.

6. Business Credit Lines

Business credit lines work similarly to regular credit cards or other revolving credit accounts. They provide lines of credit up to a specific credit limit or cap—you just don’t get a physical card. You repay what you spend in monthly installments, and you’re only charged interest on what you use.

Because it’s a revolving account, a business credit line differs from a traditional loan, providing a little more flexibility than you’d get with a lump sum. You can use funds as needed up to your maximum limit, and replenish your credit for more funding and new purchases each time you pay off your debt. Just be aware of the potential downsides, like variable payments and the cost of borrowing due to factors like interest and late fees.

Pros

• A flexible source of financing for purchasing equipment or materials because of its revolving nature, you can cover unexpected costs without taking out new loans.
• When you pay off the borrowed amount, that amount is restored to your line of credit.
• You can manage your cash flow when you’re waiting to get paid for a project but need to fund other ongoing projects.

Cons

• This option can be expensive with APRs up to 20% or higher, which makes repayment difficult.
• The time-consuming approval process may require you to have been in business for a certain amount of time, making this option difficult for newer businesses.
• Potentially low limits on borrowing amounts can make it difficult to fund certain types of business costs associated with construction.

7. Business Credit Cards

Business credit cards are a type of revolving credit line meant for business expenses. Opening an account for your business gives you a convenient way to cover everyday business expenses, with the flexibility to make purchases now and pay later.

These cards often come with lower credit limits compared to other financing options, but they’re usually easier to obtain than traditional loans. You can benefit from using business credit cards for small purchases, like office supplies, small tools, and recurring business costs.

Pros

• Easy to apply for compared to bank loans, these are a good option for contractors.
• You can allocate your budget where necessary as these cards typically don’t have restrictions on where and what the credit is used on, like typical loans might, just as long as payments are made on time.
• Business credit cards may offer rewards programs for cash back or points for additional savings.
• Credit cards can help you build credit which could help you in the future with other financing.

Cons

• Because these cards typically have lower credit limits, this option might not be great for covering large expenses like equipment or materials contractors may need.
• Overspending is easy if you don’t monitor your account activity, which could negatively impact your credit score.
• There may be fees or high interest charges if you don’t make payments on time or in full each month.

8. Trade Credit

Trade credit is an agreement where you receive materials or services immediately without paying upfront. It’s like a 0% interest loan from suppliers, enabling you to pay for building materials at a later date.

This type of arrangement helps you make larger purchases and manage cash flow, since you’re able to pay the supplier after you’ve secured clients and projects. Most suppliers give borrowers 30 days or more to repay them in full before they charge additional fees.

This can be a good option for both you and suppliers as it helps with cash flow management and business growth. However, it might not be the best choice if you know you’ll have payment delays or if you have poor credit.

Pros

• You don’t have to pay for materials and supplies right away.
• You are charged 0% interest if you pay within the agreed upon time frame.
• You can take on larger projects.
• The flexible repayment schedule is ideal for contractors.

Cons

• Delayed repayment can result in fees accumulating.
• The credit risk assessment might make it difficult to get necessary funding.
• Repayment terms may not align with when you get paid for your work.

9. Contract Financing

Contract financing is a financial agreement that provides funding based on the value of your contract. It’s a very common practice in construction, especially for large projects with high upfront costs. Getting this type of funding typically depends more on your client’s creditworthiness than your own.

Lenders will provide you a lump sum, typically around 90% of the invoice value, with the remaining balance, minus fees, repaid once the invoice is paid.

Contract financing can be a great solution if you need help managing your cash flow and funding large projects. Just be sure to weigh that against the potential downsides, like dependence on client payments and the specific requirements set by lenders.

Pros

• Fast funding can help you manage your cash flow.
• The financing is often based on the creditworthiness of the client rather than your business, so it can be beneficial if you have less established credit.
• This option helps if you need to confirm funding to your clients before beginning a project.

Cons

• You typically need your business to have been operating for at least six months to secure funding.
• You are charged fees.
• An unsecured, high risk option for lenders, the fees for this option may be higher as no collateral is required.

Get Flexible Contractor Financing

Any of these options can help you get the financing you need. Whatever route you decide to go, just make sure it’s the right fit for your business and cash flow needs before you commit to an agreement.

One of the safest routes any contractor can go is getting material financing through a service like Billd. Billd is made for contractors and subcontractors—you protect your cash flow and credit, while Billd pays upfront for your necessary supplies and materials. You then have up to 120 days to pay Billd back.

Sign Up for Billd

New customers of Billd can even get their next rental from BigRentz for free. Billd customers who secure a minimum of $25,000 in financing from Billd are also eligible for up to $1,250 reimbursement on their next BigRentz rental.