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Construction Firm Uses SBA Loans to Refinance Debt and Stay Afloat

The construction industry can be notoriously difficult to stay profitable in. Margins are often razor thin, and cash flow issues are common. When the economy takes a downturn, many construction firms find themselves struggling to make payroll and keep the lights on. For one local construction company, Small Business Administration (SBA) loans became a lifeline during the recent financial crisis.

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ABC Construction (name changed) is a small commercial contractor operating primarily in the local area. Like many similar firms, they rely heavily on bank financing and lines of credit to fund their day-to-day operations. When the recession hit in 2008, banks began tightening credit and calling in loans across the board. ABC Construction suddenly found itself facing a severe cash crunch.

As owner John Smith explained, “We had several large projects underway that required significant upfront expenditures for materials and labor. When our bank slashed our line of credit, we didn’t have the working capital to keep up with costs. We were in danger of defaulting on our commitments and having to shut down completely.”

Fortunately, their accountant suggested looking into SBA lending programs as an alternative financing option. The Small Business Administration offers several loan products aimed at helping small businesses obtain capital when conventional lending sources dry up.

One of the most popular is the SBA 7(a) loan, which can be used for a variety of general business purposes, including working capital, equipment purchases, business acquisition, and debt refinancing. The maximum loan amount is $5 million, with interest rates capped at around 6% to 8%.

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ABC Construction applied for and received a $1.5 million SBA 7(a) loan, using the proceeds to pay down more expensive credit lines and fund ongoing projects. The loan had a 10-year term with affordable monthly payments structured to fit their cash flow.

John said, “That SBA loan quite literally saved our business. It let us consolidate high interest debt and gave us the runway we needed to complete our jobs and get back on sound financial footing.”

In subsequent years, ABC accessed SBA lending two more times to finance business expansion. They used a $504 loan to purchase an office condo unit and a microloan to buy some new equipment.

John advises other construction firm owners, “Don’t wait until you’re in a crisis situation to look into SBA lending. Their programs can provide critical capital to grow your business, even when regular lending sources aren’t an option.”

SBA Loan Options for Contractors

In addition to the standard 7(a), 504 and microloans, the SBA offers some niche loan products that may benefit construction companies specifically:

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  • CAPLines: Short-term loans for general working capital and to finance contracts.
  • Export loans: For financing export transactions and expansion into foreign markets.
  • Surety bond guarantees: Help contractors secure surety bonding for public & private projects.

SBA loans can be used for virtually any business purpose, including:

  • Purchasing land and buildings
  • Acquiring equipment and machinery
  • Expanding or renovating facilities
  • Refinancing high-cost debt
  • Boosting working capital
  • Managing cash flow fluctuations

The refinancing option is especially useful for consolidating multiple debts into one affordable SBA loan payment. Overall, SBA loans offer favorable rates and terms tailored to small businesses’ needs.

Qualifying for an SBA Loan

To qualify for an SBA loan, construction businesses generally need:

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  • Be for-profit
  • Operate in the U.S.
  • Meet SBA size standards
  • Have invested equity
  • Provide collateral
  • Have reasonable owner credit scores

The SBA doesn’t lend money directly but instead partners with approved commercial lenders to administer their programs. Some of the most active SBA lenders include Wells Fargo, Chase, TD Bank, Bank of America and many local community banks.

John advises speaking to a lender familiar with SBA loans to discuss qualifications, required paperwork, approval timelines, and the overall process.

It’s smart to get pre-qualified so you know what financing options make sense for your situation. SBA loans can take a bit more upfront work than conventional small business loans but offer huge advantages that make it worthwhile for many firms.

Strategic Uses of SBA Financing

Savvy contractors use SBA lending strategically to:

  • Bridge cash flow gaps
  • Access more affordable capital
  • Lock in low fixed rates
  • Lengthen repayment terms
  • Free up money to reinvest in growth

With appropriate planning, SBA financing can provide vital capital to sustain and expand construction operations. Contractors may especially benefit from SBA loans when:

  • Traditional lending sources won’t approve financing
  • Need to consolidate high-rate debt into one lower monthly payment
  • Seeking long-term financing for commercial real estate and equipment
  • Bidding on big projects requiring substantial bonding
  • Pursuing government contracts with delayed payment schedules

The Bottom Line

For construction companies facing capital constraints, SBA loans can throw a critical lifeline. The variety of financing options make SBA programs suitable for contractors in many different situations.

John of ABC Construction summarizes, “SBA lending enabled us to keep our doors open and grow our business. I recommend any contractor struggling with financing or growth objectives explore the SBA’s loan programs.”

With proper planning and advice from qualified lenders, SBA loans offer contractors an invaluable funding resource to overcome challenges and achieve long-term success.

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