Secondary financing for General Contractor

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Secondary Financing?
Posted by: Lee Jan 6 2004, 09:28 AM
I have a GC customer who has maxed the funds borrowed from the bank prior to project completion on a day care. They are roughly $10,000 short of finishing the job and 2 months from the c/o date.

What kind of financing can be provided for this senario? I am assuming is would need to be Secondary? I dont think he is qualified for additional financing from the first bank? With such a small amount needed, would the only alternative be to seek SBA funds?

Posted by: loanuniverse Jan 6 2004, 03:01 PM

With such a small amount of money involved, I would look at the following sources for a quicker turnaround and lower fees:

1- If your GC has a residence, consider putting him on a home equity line. Pros: low fees, quick turnaround, good rates. Cons: His house is at risk.

2- Does he have a small business line of credit? Assuming that the loan from the existing bank was project specific, then there is the possibility that he might qualify for a working capital line. Pros: Quick turnaround, Decent rates. Moreover, the threshold to get a loan in this amount is not that high. I am not saying that you will get a loan just by coming in and asking! You need to have adequate financial information, experience, and personal credit. But the worst thing that can happen is that the lender says NO, and that hasn’t killed anyone yet.

3- A personal secured or unsecured loan. Pros: Quick turnaround Cons: Rates on the high end.

The problem that I see is if the General Contractor is using a working capital line to finance the construction of the day care. In that case, there is no chance of getting a working capital line established. In addition, the financing options that rely on his personal finances and cash-flow are of course limited by his personal finances and cash-flow, so that might be a problem.

You also have to look at the contractual obligations that he might have incurred with when entering into the contract. ”You mention he is two months from completion”. A lot of contractors have trouble managing their cash-flow, and this is the cause of the “half finished houses” horror stories. If he doesn’t deliver the project in time, he is risking the rest of his fee, and by the looks of it, he has already spent more than what he has received.

I am not a lender, but looking at the situation from the point of view of a customer needing $10,000 for a short period of time, I will look at those options listed above first. While the perfect world would have been to have financing in place already for exactly this type of scenario, it has to be looked at what can be done the fastest and easiest. I am also sure that there are some kinds of SBA backed small business loans that would fit. In fact, the other day I was reading about a microloan program for requests under $35,000. However, these will take time.

Once this problem is over, you can look at establishing a more permanent source of financing.
Author: Commercial Loan Underwriter