Term Loans for Construction Companies: Bridging the Gap Between Contracts

Construction revenue is lumpy. You might collect $400,000 in March, $80,000 in April, and $320,000 in May. Meanwhile, payroll hits every two weeks and suppliers expect payment on schedule regardless of when your customers pay you.

Term loans provide a lump sum of working capital to smooth these gaps. Unlike lines of credit that you draw and repay, term loans give you predictable payments and a defined payoff date — structure that some contractors prefer.

When Term Loans Make Sense for Contractors

Term loans work best in specific situations:

• Project mobilization — You have won a large contract and need capital to start work before the first draw.
• Seasonal preparation — Building cash reserves before a busy season when you will need to hire and purchase materials.
• Bridge financing — Covering the gap between projects when receivables are slow to collect.
• Specific investments — Hiring key personnel, opening a new territory, or other growth that does not fit equipment financing.
• Debt consolidation — Replacing multiple high-payment obligations with one manageable payment.

Typical Term Loan Structures

Construction term loans vary widely based on lender type and borrower profile:

Managing Lumpy Revenue

The fundamental challenge in construction is timing mismatch. You incur costs continuously but collect sporadically. Here is how term loans fit into cash management:

• Calculate your working capital cycle — How long between spending and collecting? For many contractors, this is 60-90 days.
• Size the loan appropriately — You need enough to cover typical gaps, not every worst-case scenario.
• Match payment timing — Monthly payments are standard, but some lenders offer payment structures that align with construction seasonality.
• Build in cushion — Do not borrow the absolute minimum. Unexpected delays happen in construction.

Example: A commercial HVAC contractor with $2.4M annual revenue experiences typical 60-day collection cycles. Monthly expenses run $180,000. The working capital need is roughly $360,000 (two months of expenses). A term loan of $300,000-$400,000 provides adequate cushion without over-leveraging.

What Lenders Evaluate

Term loan underwriting for construction focuses on your ability to repay despite revenue variability:

• Debt service coverage ratio — Can your cash flow cover the new payment plus existing obligations? Lenders typically want 1.25x minimum.
• Backlog quality — Signed contracts reduce revenue uncertainty. Lenders love backlog.
• Historical patterns — Does your 3-year history show you can manage through slow periods?
• Accounts receivable — What does your aging look like? Over-90-day receivables concern lenders.
• Owner experience — How long have you been running construction projects? Track record matters.
• Collateral available — Equipment, receivables, real estate. Security improves terms.

Structuring for Seasonality

If your business has pronounced seasonal patterns, discuss payment structuring with lenders. Options may include:

• Seasonal payment plans — Higher payments during busy months, lower during slow months.
• Interest-only periods — Some lenders offer interest-only payments for the first 6-12 months.
• Principal payment flexibility — Ability to make extra principal payments without penalty during strong months.
• Balloon structures — Lower payments with a larger final payment (requires refinancing strategy).

Not every lender offers these options, and they may cost more in total interest. But for contractors with severe seasonality, a payment structure that matches cash flow can be worth the premium.

Real-World Example: Project Mobilization

The situation: A concrete contractor in Phoenix has won a $1.8M commercial project. Mobilization costs (equipment transport, material deposits, crew setup) will be $340,000. The first progress payment will not arrive for 45-60 days after work begins.

The financing approach: $350,000 term loan, 3-year term, monthly payments of approximately $11,500.

Rate: 11.5% from an online lender (faster funding than bank options).

Why it worked: The signed contract provided security. The contractor showed 6 years of profitable operations and similar project completions. Payment schedule aligned with expected project cash flow.

Risk management: The contractor structured draws from the loan to match actual expenditures rather than taking all funds at once, minimizing interest costs.

True Cost Calculation

When comparing term loan offers, look beyond the rate:

• APR vs. interest rate — APR includes fees, giving a more complete cost picture.
• Origination fees — Typically 1-5% of loan amount, added to principal or paid upfront.
• Prepayment penalties — Some loans charge 1-3% for early payoff.
• Monthly vs. daily payments — Some online lenders require daily or weekly payments.
• Total repayment amount — Calculate total payments over the loan life.

A $250,000 loan at 10% for 3 years costs roughly $48,700 in interest. The same loan at 15% costs roughly $75,400. That $26,700 difference is real money — worth spending extra time to find better terms if your timeline allows.

Avoiding the Debt Trap

Term loans can solve cash flow problems or create them. Patterns that lead to trouble:

• Borrowing for losses — If your projects are not profitable, a loan just delays the reckoning.
• Stacking loans — Taking a second term loan before paying off the first creates compounding payments.
• Mismatched terms — Short-term loans for long-term needs creates refinancing risk.
• Using for fixed costs — Borrowing to cover overhead during extended slow periods signals deeper problems.
• Ignoring the payment — A new $8,000 monthly payment needs to fit your budget. Model it before borrowing.

Documentation Checklist

Prepare these documents before applying:

• Bank statements — 6-12 months of business account activity
• Tax returns — 2-3 years business and personal
• Financial statements — P&L and balance sheet, year-to-date
• Accounts receivable aging — Current report showing customer balances
• Backlog/WIP report — Contracted work with completion status
• Equipment list — If offering as collateral
• Debt schedule — Existing loans with balances and payments

Alternatives to Consider

Before committing to a term loan, consider whether other options might fit better:

• Business line of credit — If you need flexibility to draw and repay. Often better for recurring gaps.
• Invoice factoring — If receivables are the bottleneck. Advance against outstanding invoices.
• Equipment financing — If you need to buy equipment anyway, secured equipment loans often have better rates.
• Negotiate with customers — Can you get faster payment terms or progress billing adjustments?
• Negotiate with suppliers — Extended terms from major suppliers may reduce cash needs.

Term loans work well for defined needs with predictable repayment. For contractors who want structure and certainty, they provide exactly that. The key is borrowing the right amount for the right reason at sustainable terms.

Liminal can help you compare term loan options from multiple lenders. Our marketplace is free, takes about 2 minutes, and shows you offers without impacting your credit score.