4 Steps to Starting a Construction Business
There’s a lot that goes into learning how to start a construction company, and not just on the financial side. You’ll have to come up with a great business plan, wade through local and state registration, find great staff, and come up with a killer marketing strategy that sets your business apart.
No matter how you start your construction company, there are a few basic financial and business tenets you’ll need to know if you want to be successful. Here’s what to focus on, and how to make sure you build your construction company on a solid foundation.
Draft a Business Plan
Every successful business has to begin with a solid business plan. Your business plan does more than just commit your company’s vision to paper—it helps you make sure that the fundamental ideas behind your company make sense, and can lead to real revenue. You’ll know exactly how, when, and why you’re starting your business, as well as the steps you intend to take to make it happen.
In this regard, how you start a construction company is the same as you would any other business venture. You create a plan, refine it, show it to other business leaders or mentors you trust, and make refinements along the way. Plus, you’ll need to have a business plan for loans, should you decide to take one out later down the line.
Drafting a business plan isn’t too challenging, even if you don’t consider yourself to be a writing whiz.
Most business plans follow a specific template, which takes some of the guesswork out of the process. So long as you follow the steps for writing a business plan, your experience shouldn’t be too painful.
Register Your Business
Once you’ve completed a business plan you’re happy with, you’ll need to look into the rules, licenses, and registrations required within your business’ location. The construction industry’s requirements make starting a business a unique procedure. Your state, county, or town may have specific laws in place, which means you should make sure you’re fully aware of everything you need to do to get going. But here are a few overarching considerations to start with as a baseline.
Deciding on a Business Entity
Registering a business entity is the first real step toward making your company real. There are several ways to register your construction company, or any company for that matter. But the most common and straightforward option is often to form a limited liability corporation (LLC).
LLCs provide you with easy options for paying business taxes, while also covering your personal assets in case your business goes into debt or faces legal issues. There are a few different kinds of LLCs available to you as well—some are as small as a single-owner structure that lets you pay your business taxes straight from your personal filing, and others that create more structure and allow for several business partners to draw annual salaries.
It’s almost certain that your municipality requires construction companies to have specific licenses to work within their boundaries. Some may be as simple as being a recognized contractor within the town, county, or state.
Others may be more specific, such as licenses to install HVAC equipment or do other subcontracting work. You may also need licenses and permits to bid on government contracts, which vary based on where you operate.
Insure Your Business
Insuring your construction company is just as important as registering it. Construction is an inherently danger-prone business, given that you’re working with heavy machinery, electricity, and all sorts of other equipment that could do a fair bit of damage.
Most construction companies need at least one kind of insurance to stay on the right side of the law. General liability insurance is a must, as this protects you against worksite injuries, accidents, and other mishaps that could otherwise leave you with hefty bills (or even legal liability issues, depending on your circumstances).
You’ll also want to look into vehicle and property insurance policies to make sure your company’s machinery and equipment are covered in case of an unforeseen issue.
If you plan to hire workers directly as part of your construction company, you’re going to need three major forms of insurance: workers compensation, unemployment, and state disability insurance.
Workers compensation helps your employees cover bills and expenses if they’re hurt on the job, and provides them with coverage for medical costs and lost wages. Unemployment insurance helps cover employees who lose their jobs due to reasons beyond their control—such as layoffs or the disbandment of a company. And state disability insurance provides employees with coverage in case they are no longer able to work but still need assistance paying bills and cost of living expenses.
Access Small Business Loans and Financing
Aside from asking how to start a construction company, you’ll likely want to know how to finance one, as well. After all, construction is an inherently costly endeavor in terms of overhead. You have to buy supplies, rent or purchase equipment, maintain your tools, and keep a fleet of vehicles running. And that’s only the beginning.
Thankfully there are several business construction loans out there that could come in handy as you start your construction company. Some offer tons of flexibility, such as a business line of credit. Others are designed to provide you with a bigger sum of cash at once, like Small Business Administration (SBA) loans. No matter your need, there’s a business loan out there that’ll help you fulfill it.
SBA loans are a great option for small businesses: they come with low interest rates, generous terms, and a wide range of loan amounts. Banks partner with the SBA to lend small businesses cash, while the SBA provides a guarantee of up to 85% of the loan’s total value. This guarantee means that the SBA will pay the bank up to 85% of what the borrower owes in the event that the company can’t pay.
These great terms come with a catch, however. SBA loans are notoriously hard to get: You’ll need to have a long personal credit history (and a good score), a ton of patience, and the diligence to wade through a heap of paperwork. But the cost savings make it all worth it if you’re approved. Here are a few of the most common SBA loans for construction companies.
1. The SBA 7(a) Loan Program
SBA 7(a) loans are one of the more popular options for most businesses. They offer up to $5 million and can be used for a variety of purposes. You can use an SBA 7(a) loan to increase your working capital, to refinance existing debts, or to renovate your offices. Plus, these loans come with interest rates that are far below what a conventional small business loan would cost you (and significantly less than a short-term loan).
2. The SBA Microloan Program
SBA microloans are great for entrepreneurs who may not need a massive amount of cash but still need access to capital. SBA microloans are made for small and new businesses seeking less than $50,000, and are designed to help these companies build out their budding enterprises. Microloan terms are fairly generous as well, as they allow the borrower to pay off the loan over the course of up to six years.
3. The SBA CDC/504 Loan Program
These loans are a bit different than the other two, insofar as they’re designed to help small businesses purchase major fixed assets (i.e. large equipment and commercial real estate). CDC loans provide up to $5.5 million to borrowers, and come with repayment terms of 10 or 20 years. This loan could be particularly helpful if you need help purchasing heavy machinery for your construction company.
SBA loans aren’t the only options for small business owners to finance their company. In fact, there are plenty of loans out there that come with less stringent credit history requirements. Equipment financing is a particularly useful option for borrowers without a spotless or long-standing credit history. Equipment loans are designed to help business owners purchase machinery for their company. The loan amount is tied specifically to the cost of the equipment being purchased, and must only go to that purchase itself.
But in exchange for these terms, you’ll give up the collateral requirement that comes with most other loan types. The equipment’s value serves as collateral instead, which means the lender will repossess your machinery if you can’t make payments. This is a great option for businesses that are tight on cash but have a specific purchasing need.
Business Term Loans
Term loans might be right for you if you don’t qualify for an SBA loan, or you need cash faster than the SBA loan process allows for. Term loans provide a lump sum to borrowers, which they can use for any of business purposes they deem fit. So long as you’ve been in business for a while, have a good personal credit score (and a business credit score), you’re likely to be a decent candidate.
These loans vary in interest rate, repayment terms, and the amount of money provided. You can work out these details with your lender and shop around offers to get the best value.
The Bottom Line
There are plenty of steps required to get your construction company off the ground, but the upfront investment of your time and effort pays off in the end. By starting off on the right foot, you’ll create less work down the line when you’re busy running daily operations.
Each of these steps can set you up for long-term success, which is the ultimate goal of running any business. So long as you’re in the planning stages anyway, it’s best to check off all of these requirements at first, rather than playing catch-up later.
Brian O’Connor is a small business owner and contributing writer for JustBusiness.
Brian is the former director of digital strategy at Morgan Stanley, has worked at Foreign Affairs magazine, Student Loan Hero, and is a partner of a small consulting firm. Combined, these experiences allow him to offer a unique perspective on the challenges small business owners face. Brian writes about finance, business strategy, and digital marketing for JustBusiness.