While in theory a construction working capital loan can be used for just about any purpose, its most popular use is for paying off all bills and supply purchases required for normal operations. For a construction company, that usually means paying salaries of workers, office expenses, and equipment and supplies.
Construction working capital loans are usually needed to help a company deal with a temporary lack of funds. The construction company may end up earning a lot of money over a course of the year. But sometimes there are dry spells, and some customers do pay late. A construction company then gets a loan when revenues are not currently available.
When the clients pay, then the working capital loan is repaid because the company doesn’t need the extra money anymore. This is why construction working capital loans are usually for the short term only. Another advantage of short term loans is that you pay less in interest.
Yet despite all these arguments for short term loans, long term loans (or even intermediate term loans of up to three years) do have their advantages as well:
- Long term loans are easier to get. Everyone knows that traditional bank loans are quite tedious affairs. They take a very long time to complete, and there’s a great deal of paperwork involved. And often, the process doesn’t end in approval for the loan application.
That’s the advantage of working capital loans in general. Usually, the process is much easy and quick, and the approval rate is pretty high.
But the process may be faster and the approval may be higher when you ask for a long term loan. That’s because the lender gets more money back from its loan. Banks, like other finance institutions, like it when they earn more money for their services.
- You focus beyond making loan payments. With short term loans, repayment periods are short, but the payment amounts are high per month. Long term loans, on the other hand, require you to pay lower amounts per month. That has its advantages, even though you’re required to pay back the loan for a longer period of time and consequently pay more in interest.
When you’re required only to pay a small amount, then it’s easier for you to pay back the loan on time. You no longer have to wonder about where to get the money for the monthly payments. It’s more likely that you can get the money ready, so you can focus on your construction business more.
- It lowers your stress levels. Trying to figure out where you can get money to pay your loan can be truly stressful. You may also end up having to borrow more money to pay back a loan.
With long term loans, you also don’t have to worry about any unexpected expenses that can come up. You can sleep soundly at night knowing that your working capital can cover even unforeseen expenses.
So if possible, try to get a long term loan. By going this route, you don’t have to worry about making large payments, and you can focus your energy into doing what you do best: growing your business.