Construction Financing: Options, Costs and How to Choose

What Construction Financing Covers (and What It Doesn't) #

"Construction financing" means two different things. A construction loan is project-level debt, usually taken by an owner or developer, secured by the land or building, and drawn in stages as inspections clear each phase. That is one specific product.

For most contractors, the real problem is a cash gap. You buy lumber and pay the framing crew in week three, but the general contractor's payment for that work arrives on day 60, after your pay application is approved and retainage is held back. Financing in this sense is any money that bridges that gap: working capital, equipment financing, a line you can draw on, or a short advance against what you have already billed.

It does not usually mean money for the whole job from start to finish. Matching the product to the gap is the whole game, and the rest of this page is about doing that.

The Main Options Side by Side #

Each option suits a different kind of gap. Costs are shown the way each product is quoted.

The fast options are not a free upgrade. They are priced for speed and for the lender's risk on a business that may not have a long credit file.

What Each Option Really Costs #

Two pricing methods appear in this trade, and they are not interchangeable.

An interest rate (APR) is the annual cost of borrowing on the balance you still owe. Banks and SBA lenders quote this way, so you can compare their offers directly.

A factor rate is a multiplier on the amount you receive. A factor of 1.25 (≈ 65–75% APR if repaid over 8 months) means you repay 1.25 times the advance, however quickly you pay it off. The dollar cost is fixed, so the annualized rate depends on the repayment period. The faster you repay, the higher the APR.

Here is the math on a $50,000 advance at a 1.25 factor:

• Total payback: $62,500
• Cost of the money: $12,500
• Repaid over 8 months, the annualized cost is roughly 65–75% APR.

Now compare a bank term loan. For example, a $50,000 term loan at 9% APR over three years costs about $7,250 in interest in total. That is a much smaller bill, though over a longer period. The catch is that you wait weeks for approval, and you may have to pledge property or sign a personal guarantee.

The honest comparison: the bank costs less, both in annual rate and in total dollars, but it takes longer to arrive. The advance costs more, but it can arrive in time to make payroll on Friday. Choose the one whose cost matches the value of the timing.

Matching the Funding to the Job's Cash Cycle #

The best way to choose is to map your cash cycle, job by job.

Example one: a tenant improvement job. You win a $180,000 contract billed monthly, with payment on net 45 terms. Materials for month one come to $60,000, and you pay the sub crew weekly. The gap lasts about 45 days, and you need about $60,000 plus payroll. A short-term line or a revenue-based advance can cover that gap, then repay as the client's checks land. If you have a bank line already in place, use that first, because it costs less.

Example two: buying a skid steer. A $90,000 machine will work for six to eight years. Equipment financing fits because the machine secures the loan and the term can run roughly as long as the machine's useful life. Paying it off in eight months would strain your cash flow for a tool that earns over years.

Example three: retainage. A $200,000 job with 10% retainage holds back $20,000 until closeout, which can be months after the work is done. Short-term money is a poor fit here, because a short repayment schedule can run out long before the cash arrives. A line of credit or a longer bank facility is safer, or a plan to cover retainage from other work.

Example four: seasonality. A roofing company may see strong sales in spring and early summer and thin months in winter. A revolving line of credit, drawn in the slow months and paid down in the busy ones, matches that pattern better than a one-time advance.

The rule is simple. Match the term to the life of the asset or the length of the receivable cycle. If the money is for a gap that closes in 45 days, don't borrow for 36 months. If the money buys a machine that lasts seven years, don't repay it in eight months.

How Lenders Decide on a Contractor Application #

Every lender looks at money coming in and money going out, but construction underwriting has its own details.

Most lenders will ask for:

• Six to twelve months of business bank statements, to see deposit patterns and cash low points
• Your accounts receivable aging report, showing who owes you and how late they pay
• A work-in-progress (WIP) schedule listing each open job, its contract value, billings to date and costs to date
• Copies of signed contracts, pay applications and change orders
• Your contractor license, insurance certificates and any bonding
• Owner credit history and existing debt payments

Lenders also look at customer concentration. If, for example, one general contractor accounts for 70% of your revenue, that is a risk even if the GC pays on time. Backlog matters too: signed work that starts next month counts for more than promises.

Revenue-based and advance lenders weight bank deposits and receivables more heavily and look less at credit scores and collateral. Banks and SBA lenders weight credit, collateral and documented financials more heavily. Neither approach is wrong. They measure different things.

When a Bank or SBA Loan Is the Right Tool #

A bank or SBA loan is the better choice when:

• You are buying property, a building or a large fleet, where a long term and a lower rate matter most.
• You need predictable monthly payments you can plan around for several years.
• Your financials are clean, your credit is good, and you can wait several weeks for approval.
• You want a line of credit for seasonal swings, which usually costs far less than a short-term advance.

Banks offer what fast lenders generally cannot: low annual rates, long repayment periods and a relationship that can grow with your business. SBA 7(a) loans extend those terms to many small businesses that might not otherwise qualify, because the government guarantee shares part of the lender's risk.

A bank or SBA loan is not the right tool when the cash gap is due in two weeks, when your financials are still thin, or when you need money for a single short job that a bank will not approve in time. In those cases a faster product that costs more may still be the better choice, as long as you know the true cost and have a repayment plan.

Next Steps Before You Apply #

Before you talk to any lender, do this work:

1. Name the gap. Write down what the money is for, how much you need, and when it comes back in.
2. Pull your statements. Gather 6 to 12 months of business bank statements and your current receivables aging.
3. Build the WIP schedule. List every open job with its contract value, billed to date, cost to date and retainage held.
4. Compare total cost. Ask each lender for the total payback in dollars and the APR equivalent. If an offer is quoted as a factor rate, convert it before you compare.
5. Match the term to the gap. Pick the shortest product that still leaves your payroll and supplier payments safe.

If a bank or SBA loan fits your timeline and your file, start there. If you need funding in days, or your revenue is stronger than your credit or collateral, SiteDraw Capital and our network of funding partners can review your statements and receivables and show you the total payback and APR equivalent before you decide.