Table of Contents
Running a construction business means managing a constant flow of expenses — such as materials, equipment, labor, and more — often before a client payment arrives. Construction business loans are designed to help contractors and builders bridge that gap, providing the capital needed to keep projects moving and businesses growing.
This guide breaks down the types of construction business loans available, how they work, and what it takes to qualify.
Key Points
• Commercial construction loans cover the costs of building or renovating commercial property — including office space, warehouses, and multi-family buildings.
• Several financing options exist for construction businesses, including SBA 7(a) loans, SBA 504 loans, business lines of credit, and equipment financing, each designed to serve different funding needs.
• SBA 504 loans offer long-term fixed-rate financing of up to $5.5 million, usable for purchasing real estate, constructing buildings, buying equipment, and consolidating or refinancing debt under certain conditions.
• A business line of credit gives owners access to revolving funds up to a set limit, with the available balance replenishing as repayments are made.
• From application to closing, construction business loans typically take 30 to 90 days or more and are available through traditional banks, credit unions, online lenders, and SBA-approved institutions.
What Is a Construction Business Loan?
Small construction businesses tend to be capital intensive. They may require money to cover a range of needs, from buying building materials to equipment purchases to paying for skilled labor. This capital is not always readily at hand, and construction business loans are a type of small business financing designed to help make up the gap.
How Construction Loans Differ from Traditional Business Loans
Construction loans tend to differ from traditional business loans mainly in the way that they distribute money. A traditional business loan distributes funds in one lump sum. Construction business loans, on the other hand, generally release funds in installments. These are known as “draws” and are typically tied to major milestones such as the laying of a foundation or the framing of a house.
Construction loans’ terms – the length of time over which you need to pay back the loan – may vary as well. For instance, some construction loans may have a short term, such as one year, over which the project must be finished.
Types of Construction Business Loans
There are several types of business loans that may be available to your construction business. Getting to know them can help you understand what loan is appropriate for what situation.
Commercial Construction Loans
A commercial construction loan is designed to help cover the cost of building or renovating commercial property. This could include office space, warehouses, and multi-family buildings. The loans can be used to buy land or purchase equipment, or for operating expenses and payroll.
A commercial construction loan typically works on a draw schedule and will usually have a relatively short term for repayment – generally six to 36 months.
Recommended: Commercial Real Estate Loans
SBA 7(a) and 504 Loans
SBA business loans are backed by the U.S. Small Business Association (SBA), and SBA 7(a) loans are the most popular loans among them. They can be used for a variety of purposes such as refinancing business debt, purchasing equipment, providing working capital, and acquiring and improving real estate and buildings. SBA 7(a) loans are lump sum loans paid back monthly over a set period.
The SBA also backs 504 loans. These are long-term fixed-rate loans that can provide up to $5.5 million. The funds can be used to purchase real estate, construct new buildings, purchase equipment, and consolidate or refinance debt under certain conditions. They can also be used for the improvement of existing land or facilities.
SBA 504 loans cannot be used to provide working capital or purchase inventory, nor can they be used for the financing of AI-related working capital, intellectual property, or consulting services soft costs.
One potential benefit of SBA loans: They often offer lower interest rates than traditional business loans, because the government guarantees part of the loan.
Construction Line of Credit
A business line of credit is a set period during which a business owner can access revolving credit funds as needed up to a certain limit. When you pay back what you’ve drawn from the line, the amount you can draw out is replenished and you can borrow again. You only pay interest on the funds that you actually use, making lines of credit a flexible option for business owners.
Equipment Financing
Equipment financing is a kind of specialized loan designed to help businesses buy physical assets, such as machinery, equipment, technology, or vehicles. The assets themselves act as collateral for the loan. That means that if you fail to repay your loan, your lender can seize the assets to recoup as much of their losses as they can.
That said, because these loans are collateralized, they may be less expensive and/or easier to qualify for than other loan and credit options.
How Construction Business Loans Work
Not all construction business loans work the same way. Some, such as the SBA loan, offer lump sums; some are lines of credit; and others, such as the commercial construction loan, work on a drawdown schedule.
Understanding Draw Schedules
As mentioned above, drawdown schedules typically tie the release of funds to certain milestones, such as foundation laying. As each milestone is completed, a lender will usually send a third-party inspector to make sure the milestone is complete. At this point, more money is released, and work can begin on the next phase.
This type of arrangement can serve both lender and borrower. Lenders take on less risk as value is verified before funds are released. Borrowers are kept to specific schedules and only pay interest on the money they’ve already drawn down, not the full approved amount of the loan.
How to Qualify for a Construction Loan for Small Businesses
The process for qualifying for a construction loan for small businesses will depend on the loan. In general, it’s extremely helpful to have a good credit score and a detailed business plan for how you will spend the money. Lenders will also typically look to make sure that you have enough cash flow to repay any loans they extend to you. To qualify for a commercial construction loan, you will likely need to make a down payment as well.
Recommended: How to Apply for a Small Business Loan
Where to Get Construction Business Loans
Construction business loans are available through traditional banks, credit unions, and online lenders. SBA loans are available through SBA-approved lenders.
The Takeaway
Construction businesses face unique financial demands. Fortunately, there are loan products built to address them. The right loan depends on your specific needs, your creditworthiness, and how you plan to use the funds. By understanding your options, you’ll be better positioned to choose a loan that supports your business and keeps your projects on track.
Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.
FAQ
Can an LLC get a construction loan?
Yes, you can potentially qualify for an LLC construction business loan if your construction business is organized as a limited liability company (LLC).
What credit score do I need for a construction business loan?
Credit score requirements will vary by lender. Borrowers with higher scores – of 680 or more – are more likely to qualify for a loan. Those with lower scores may still qualify, but their loans may come with higher interest rates or shorter terms, or require larger down payments.
How long does it take to get approved for a construction business loan?
While it depends on the exact type of loan, from application to closing a construction business loan may take about 30 to 90 days or more.
What can construction business loan funds be used for?
Most construction business loans cover a range of needs, from purchasing building materials to equipment purchases to paying for labor. However, this is not true for all of them. A 504 SBA loan, for instance, doesn’t allow funds to be used for working capital. Be sure to check loan parameters carefully before applying for a loan.
What is the difference between a construction line of credit and a construction loan?
A construction line of credit is a form of revolving credit that allows you to borrow up to a certain limit, repay the loan, and borrow again. More traditional business loans offer lump sums and monthly repayment schedules, while some construction loans use a draw schedule, in which funds are released when major milestones are achieved.
Photo credit: iStock/PeopleImages
SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
SOSMB-Q226-130