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The Power of Leverage: A contractor’s guide to efficiently scale new construction business with private lending

As a respected, general contractor in Florida, you have assembled the team needed to grow your business and profits. You have been eyeing new construction projects but do not have the cash necessary to take advantage of all of the opportunities in front of you. You may not be aware that RBI Private Lending specializes in construction loans as an alternative to cash that can maximize your return on your investment. Construction companies can take on additional projects and increase their overall profitability by utilizing the power of leverage through a private loan.  

What is Financial Leverage?

Financial leverage occurs when a loan (borrowed money) is used as a source of funds to increase the possible return of a project or investment. Said a different way, it is the amount of debt a business uses to finance assets. Essentially, investors use leverage to amplify their purchasing power.1

A general contractor can use financial leverage by partnering with an outside resource, such as RBI Private Lending, to maximize the potential of your construction company. It can help your business grow, allowing you to take on more or larger projects and/or expand your team. Construction business loans are specifically targeted to the needs of the construction industry. These short term loans help contracting businesses grow by providing the funds you need during the construction phase of each project, whether those costs are payroll, building materials, or equipment leasing.

Consider this example:

If you have $100k cash on hand to build a house – you can pay cash for it and after it’s built, you receive a 25% return on your investment, or $25,000. The problem is you must sell the house before you have the cash again to build another one. This can result in cash flow problems and limit your opportunities to grow your construction business.

Alternatively, you can use your $100K cash to build two homes. With a leveraged purchase, you can work with a private lender and receive a new construction loan for the remaining 50% on each home to supplement the $100K cash. Assuming you sell both homes for $125,000, your profit is $50,000 (minus fees and interest paid on the loan), so your ROI is considerably higher.

Though you won’t receive the same return per house as you would with one home and using only cash, you will still be better off by maximizing the return on two investments instead of one. Construction loan lenders provide contractor financing, allowing you to maintain a construction timeline that maximizes the team you have built.

What are the Challenges of Scaling a Construction Business

Construction firms often deal with limited capital. The lack of financial resources is the primary obstacle that prevents contractors from taking on more projects or expanding operations. To scale up, more laborers must be hired or more equipment must be purchased. These growth strategies require extra capital and oftentimes you simply don’t have it. This is where private lenders offering construction loans are a game changer. RBI Private Lending understands construction companies and their needs. We have been offering construction loans for many years. Unlike a traditional mortgage, our construction loans work toward meeting your growth goals.

Another challenge that contractors face is competition. You are increasingly competing with other builders for land, properties to renovate, etc. and to succeed, you must leverage capital to stay ahead. In addition to having access to construction loans, you must have a partner who understands that speed is also a factor. We work with general contractors and their financing needs every week, helping them capitalize on opportunities before their competitors steal them away!

Advantages and Disadvantages of Financial Leverage

This financing concept gives construction businesses greater flexibility – and the ability to accomplish more…

  • It’s a viable way to amplify profits
  • It allows contractors to build more homes at one time
  • It’s a strategic way to meet short-term financing needs
  • It creates more opportunities to expand your business

But these advantages must be balanced with the factors that must be weighed which can negatively impact leveraged transactions:

  • New construction loans require you to pay interest and closing costs, making the borrowed capital more expensive than cash
  • Leveraged purchases come with increased risk in terms of unforeseen challenges that could derail your construction project and threaten your ability to pay the loan back

Private Lending: A Game Changer for Contractors

A private lender, such as RBI Private Lending, offers viable solutions to the many challenges construction companies and general contractors face when trying to increase profits and grow your business. Unlike traditional lending, private lending is more flexible, making it an ideal way for contractors to scale.

 Here are several reasons you should consider using a private lender:

  • Less stringent than traditional banks, credit unions, or online lenders
  • Speed to close/quick access to capital vs most lenders
  • Transparent – clearly communicates terms and conditions
  • Responsive to your needs
  • Collaborative – can become a strategic partner, offering advice and support
  • Unlike a typical mortgage, these loans support the construction process
  • Competitive construction loan rates
  • RBI Private Lending is even bilingual!

RBI Private Lending is very well-versed in financial leveraging via new construction loans.

Here are some examples of builders we’ve helped:

 One of our clients, who came to us through a broker, builds 20-25 homes per year in a hot market in Florida. He wasn’t aware of the benefits of financial leveraging and was doing deals exclusively in cash. Our client was trying to scale his business but was limited because of a lack of liquidity. He would complete 85% of each home’s construction with his own cash – meaning he has a lot of equity – and the more equity you have, the more you can draw out. With his construction so advanced, we were able to give him more money up front so he could use it for other projects. We provided him a tool (the construction loan) to maintain his growing profits so he can deliver at least 10 more homes a year.

 A foreign national who is building single family homes recently obtained a new construction loan from RBI Private Lending, enabling him to build six houses. Now, we are working with him on another $2.2 million loan so he can build 10 more homes. By financing with RBI Private Lending, he was able to increase his cashflow. Next year, our client is predicting he will build 50 houses. RBI helped make this possibility a reality.

We also recently helped a contractor from Brazil that was looking to develop houses in South Florida. Through a $1.8 million new construction loan, he was able to build nine houses. The financial leveraging allowed him to have more cashflow. By using a construction loan, they had lower monthly payments during the construction project.

Construction Loan FAQs

What type of loan is best for construction?

The best type of loan for construction is typically a construction loan. These loans are specifically designed to finance the building or renovation of a property. Here’s why they are often preferred:

  1. Short-term Financing: Construction loans are usually short-term and cover the duration of the construction project.
  2. Disbursement in Stages: The funds are disbursed in stages, or “draws,” as different phases of the project are completed, aligning with the construction timeline.
  3. Interest-Only Payments: During construction, borrowers often pay only interest on the amount drawn, not the full loan amount.

However, the suitability of a construction loan can depend on the specifics of the project and the borrower’s financial situation, so it’s advisable to consult with an experianced lender like RBI to determine the best option for your particular needs.

What do you mean by financial leverage?

In this context, financial leverage refers to the use of borrowed money (debt) by a contracting business to finance the purchase of assets, materials, and labor with the expectation that the income or capital gain from the new construction will exceed the cost of borrowing. In simpler terms, it’s the practice of using borrowed funds to increase the potential return of an investment.

The key idea behind financial leverage is that when a construction company uses debt to invest, the potential return on the investment can be amplified. However, it’s important to note that while leverage can magnify returns, it can also magnify losses if the investment doesn’t perform as expected. Therefore, while financial leverage can be a powerful tool for growth, it also involves higher risk, making it even more critical to partner with a experienced lender like RBI Private Lending.

What is the difference between a construction loan and a regular loan?

Construction loans and regular loans differ in several key ways:

  1. Purpose: Construction loans are specifically for financing the building or significant renovation of a home or property, while regular loans can be for various purposes, including buying a car, consolidating debt, or financing education.
  2. Disbursement: Construction loans are typically disbursed in stages as the construction progresses, whereas regular loans are usually disbursed in a lump sum.
  3. Repayment Terms: During the construction phase, borrowers of construction loans often pay only interest. After construction, the loan may convert to a standard mortgage. Regular loans typically have a set repayment schedule from the beginning.
  4. Duration: Construction loans are often short-term (usually 1 year) and are meant to be either paid off or converted to a regular loan after construction. Regular loans can have various lengths, often several years.
  5. Collateral: For construction loans, the property under construction usually serves as collateral. Regular loans can have different forms of collateral or may be unsecured.
  6. Interest Rates: Construction loans often have higher interest rates compared to regular, long-term loans due to the higher risk involved.

How do I grow my contractor business?

Growing a contractor business involves several strategies:

  1. Quality Work and Customer Service: Ensure high-quality work and exceptional customer service to build a strong reputation and encourage repeat business and referrals.
  2. Networking: Network with other professionals in the construction industry, such as architects, real estate agents, and suppliers, who can recommend your services. RBI can be a member of your network and a partner in building your construction business.
  3. Online Presence: Develop a robust online presence, including a professional website and active social media profiles, to showcase your work and attract new clients.
  4. Specialization: Consider specializing in a niche area of construction to differentiate your business from competitors.
  5. Partnerships and Collaborations: Partner with other businesses to expand your reach and take on larger projects.
  6. Customer Feedback: Regularly seek customer feedback to improve your services.
  7. Expand Your Services: Consider expanding your range of services to cater to a broader market.
  8. Manage Finances Wisely: Keep a close eye on your finances, including budgeting, pricing strategy, and cash flow management. As you seek a construction loan for a project, partner with an experienced private lender like RBI Private Lending.
  9. Continual Learning: Stay updated with the latest trends, technologies, and regulations in the construction industry.

Is it hard to get a loan as a contractor?

Getting a loan as a contractor can be more challenging than for someone with a traditional employment situation or someone seeking to borrow money for a home purchase for example. This is primarily because contractors often have variable income and non-traditional employment records, which can be perceived as higher risk by lenders. However, a private lender that has construction only loan programs understands the construction loan requirements of building contractors and has the experiance and flexibility to meet your needs. Here are some factors that can influence your ability to secure a construction loan:

  1. Income Stability: Lenders will look for stable and consistent income, even if it’s from various sources.
  2. Credit and Project History: A strong business credit score and a history of successfully completed construction projects go a long way in helping you receive loan approval.
  3. Financial Records: Well-maintained financial records, including tax returns, bank statements, and contracts, can help demonstrate your financial stability and earning potential.
  4. Down Payment: A larger down payment might be required to offset the perceived risk.
  5. Professional Reputation: References or a strong reputation in your industry will help.
  6. Loan Type: Some loan types may be more contractor-friendly, offering more flexible terms.

Contractors seeking loans should prepare thorough documentation of their income and financial stability to improve their chances of approval. Consulting with a financial advisor or a loan officer who has experience with self-employed or contract-based professionals can also be beneficial.

By combining these strategies, you can steadily grow your contractor business, improve your market position, and increase profitability.

Why Choose RBI?

In the end, it is about creating strong client relationships. And at RBI Private Lending, we do that by using our deep experience in financial leveraging via new construction loans to help builders and general contractors optimize profits, successfully scale, and grow your businesses.

Please consider RBI Private Lending for your next construction project. Our organization is comprised of seasoned professionals that will provide a leveraging solution tailored to your needs. We are confident that we can help you overcome the challenges you face, accomplish your goals and provide you with the service you deserve. Let’s partner together for success! Click here for more information.

1 Source: https://www.investopedia.com/terms/l/leverage.asp

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