How To Start A Construction Business: Step-By-Step Guide
Part 1 - Local Market Research
Aspiring entrepreneurs who want to venture into the construction industry should start their journey by doing detailed market research into the local real estate market. When you start a construction company, you’ll need to know whether the local market is a viable place for a new construction business. This means making sure that the market isn’t already saturated with construction companies and that the demand is high enough.
Your local market research should involve the following:
- Identifying the demand in your local area: Identify the types of construction projects that are in demand. Whether these are residential, commercial, or industrial. This will be useful for understanding which type of construction projects to focus on in your business. For example, if you’re in an area that has a booming residential real estate market, then residential projects could be a great opportunity.
- Analyzing the competition: Discover who your local competitors in the construction industry are, and what services they offer. Do an analysis of their strengths and weaknesses, to find out where the gaps are. You’ll need to determine where your business could fit, in terms of solving a need in the market that isn’t being met sufficiently by your competitors.
- Understanding your target audience: It’s important to do extensive research into who your potential clients would be, and what their preferences and needs are. Understanding the needs of your future clients is the best way to create a successful business and appeal to the widest range of people. This insight will help you tailor your services and marketing strategy.
To start a construction company, one of the first places you can do local market research is with the U.S. Small Business Administration (SBA). The SBA will provide a general overview of business markets in the area, and potential customers with hard data from a variety of resources that won’t cost anything. For more specific insights, you can look at local industry publications.
You can also do your own in-depth market research by engaging with potential customers directly. You can use resources like surveys or focus groups to find out exactly what your customers need, by asking them directly. Paid market research is another easy option, to make sure that you cover all your bases.
Part 2 - Create A Business Plan
The next step on your path to start a construction company is creating a solid business plan, once you understand the local market. A well-structured business plan is essentially a roadmap to success for construction companies because it outlines your business goals and your plans to achieve them. A business plan will keep you focused on the path towards achieving your end goal and is the blueprint for making your own construction business profitable.
Here’s what you should include in your business plan:
1 – Executive Summary
The executive summary of a business plan should be a summary of what you intend to achieve when you start a construction company. Outline the specific, measurable objectives your construction business aims to achieve. These could include revenue targets, project completion goals, or market share objectives. This section gives potential investors or partners a good look into your business and an overview of what you aim to achieve.
You can also include a brief history of the company, to give potential investors more detail on the company’s background. Along with this, include a quick snapshot of the market opportunities that you have identified that your construction company can solve. These are a good way to show the company’s potential for success.
2 – Market Analysis
This is where your local market analysis will come in handy. A detailed look into the market is a vital element of any construction company’s business plan. You should include information on the local market trends, demographics and potential growth for construction companies.
You should also outline your exact target market, and why these are the right people to target. This means discussing the target market’s needs, preferences, and pain points. Consider providing case studies or client profiles, if you can.
Include a SWOT analysis, to show that you have assessed your company’s strengths, weaknesses, opportunities, and threats. You can use this analysis to develop strategies that leverage your strengths and mitigate your weaknesses.
3 – Legal Structure
You’ll need to choose a legal business structure for your construction company. This step determines how you’ll be taxed and your level of personal liability. Consider consulting with a legal professional to make the right choice. Outline this choice in your business plan and highlight the reasons behind your choice, such as taxation and liability.
Introduce your management team and include information on how the ownership of the business will be structured. This helps investors to envision the business as a whole and get to know the management of the company.
4 – Services and Products
Detail the construction services that you’ll be offering in your construction business. Include information on what makes your services unique in comparison to your competitors. This will be your Unique Selling Proposition (USP).
Explain how your construction company ensures quality workmanship, adheres to safety standards, and uses high-quality materials. Investors will want to know that each project will be done to a high standard and that quality will be closely controlled. You can also give insights into your pricing and how you came to these numbers.
5 – Sales and Marketing Strategy
This is a closer look at how you plan to reach your target audience, so this section should include your marketing strategy, a budget and the channels you will be using to achieve the marketing strategy (for example digital marketing and networking).
It should also include the sales strategy, which will show potential partners or investors how you plan on making sure that you create a successful construction business which sells its services to the audience you have already outlined.
Part 3 - Choose Your Business Type
Once you have a business plan, you’ll need to register your construction company. The structure you choose will have legal, financial, and operational implications for your construction business. The following business structures can be used:
1 – Limited Liability Company (LLC)
An LLC is a commonly used business structure in the real estate field, as it allows for personal liability to be taken out of the equation and offers tax flexibility. The LLC member’s assets are protected from any business debts and legal issues, and there’s less administration and formalities with this business structure.
Best suited for: LLCs are well suited to those who want to protect their personal assets from their construction company and need a flexible tax situation. This is often used by small to medium sized construction businesses.
2- Sole Proprietorship
This is the simplest business structure where you are the sole owner and operator of the business. This offers the construction business owner full control over all business decisions. In this case, tax is reported on your personal tax return, and your personal assets are at risk if the business incurs debt or legal trouble.
Best suited for: A sole proprietorship is best for small-scale, owner-operated businesses where there isn’t a high financial risk.
3 – Partnership
A partnership involves 2 or more parties that share ownership of the business. This means that they share profits and responsibilities. When it comes to tax, the business’s income is reported on each partner’s personal tax return, and they are therefore liable for any debts.
Best suited for: Partnerships prove advantageous when you aim to distribute the business’s workload and financial obligations. When partners contribute different skills to the business, this significantly enhances a construction business.
4 – Corporation
Forming a corporation means that the construction business is a separate entity entirely from the owners who are shareholders. These shareholders will therefore have limited liability, and their personal assets are protected from issues with the business. Corporations are typically taxed as C corporations and there are more formalities.
Best suited for: Large construction companies, those who need significant investment, and businesses with complex ownership structures may choose to incorporate.
Part 4 - Acquire All The Necessary Licenses
Ensuring legal compliance and acquiring all the necessary licenses is a crucial aspect to starting a construction company. The need for a license or permit to legally operate can vary depending on factors such as your state, business location, company size, and the nature of your construction projects. These requirements may apply at both the federal and state levels.
Federal laws indicate that permits are required for activities like transportation, drilling and mining. Which means that a permit will be needed to transport building materials and other equipment. State licenses and permits are centered around location. Zoning regulations can differ vastly, so it’s vital to check that the location is viable from that standpoint too.
Start by researching the area where you plan to open your construction business, different cities and states have specific requirements. Licenses and permits will vary, so this is an important step. The SBA website can be a useful tool for this.
Next, you’ll need to complete all the necessary paperwork in order to obtain the licenses and permits relevant to your area. This involves providing details about your business, for example the type of projects you will be providing services for, and more.
General liability insurance is the next step in the process. General liability insurance is an essential element for any construction company because your personal assets will be protected through the general liability insurance, if there are any unforeseen accidents.
Lacking the appropriate licenses or permits could lead to substantial fines, tax repercussions, and even the potential of a government-ordered shutdown for your construction company. So, this step should be taken sooner, rather than later, or the consequences could be dire.
Part 5 - Get Funding For Your Building Projects
Securing the funding for your company’s building projects is a pivotal step towards building a successful business. This step requires using the business plan you have developed and finding the financing options and lender that best fit your financial and business goals.
Funding Option 1: Construction Loans
Construction loans are designed specifically for construction projects which means that the terms of these loans are aimed at providing the necessary funding for them, in the timeframe required.
As such, they’re typically short-term loans that may have interest-only payments during the construction phase. Construction loans provide funds to cover land acquisition, construction costs, and related expenses. The short-term nature of these loans can be useful for construction projects because a long-term commitment isn’t required, such as a traditional bank loan.
Construction loans are a good option to consider when you’re building a successful construction business, because they can be easier to qualify for than traditional loans, and they cover all the stages of the project. Bear in mind however, that they come with higher interest rates and shorter repayment periods.
Construction loans provide the chance for various types of construction companies to get funding for their deals, based on the fact that they have more lenient lending criteria than many other loan types.
Funding Option 2: Traditional Bank Loans
Traditional banks offer a range of loans that can be used to fund building projects. These include small business loans, terms loans and more. These loans will have more competitive interest rates and are geared towards businesses that have a solid credit history. The repayments on traditional bank loans will follow a structured plan and fall in line with traditional rules and regulations around lending.
Traditional bank loans will need some form of collateral, and they will have stringent lending criteria. These loans may also have longer approval times which means that they may not be the best fit for time-sensitive construction projects. You can find a full list of banks that offer construction loans here.
Funding Option 3: Business Lines of Credit
Business lines of credit provide a revolving credit limit that you can draw from as needed. The flexibility that this offers makes it a good funding option for construction projects as there are various costs that need to be covered.
Business lines of credit offer interest-only payment options and funds are provided quickly. For a construction business, these two factors are useful for projects as funds are generally needed quickly, to beat the competition once you’ve found a good deal. Along with this, the credit aspect allows construction businesses to use funds as and when they need them, throughout each project.
However, business lines of credit offer variable interest rates which can be higher, and the credit aspect creates a scenario where overspending can happen easier. It’s important to stick to your budget and only take the funds needed for each project.
Funding Option 4: Crowdfunding
Crowdfunding in real estate has become a popular alternative for funding projects, such as building a property. There are various crowdfunding platforms that can be used, including Fundrise and CrowdStreet. On these platforms, investors usually pool their money online, using a financial technology solution or on the crowdfunding site itself, to fund a real estate investment.
Crowdfunding gives construction businesses access to a wide pool of investors, and there are flexible terms on these loans. However, it’s important to note that funding is not guaranteed this way, and it is up to the group of investors. If the project is attractive and likely to provide good returns, then a higher level of interest from investors is likely.
The key here is to provide a detailed outline of the project that you need funding for, with an attractive proposition for investors. This funding option is suited to various project options, including large scale projects that need funding from multiple investors.
Funding Option 5: Peer-To-Peer Lending
Peer-to-peer lending is when borrowers use a platform to get connected with individual investors who they can lend money from. These loans can be used for construction projects, and often have lower interest rates which makes them a cost-effective option for construction businesses.
Peer-to-peer lending offers borrowers a streamlined online process that is often quicker and easier than traditional loans. This, coupled with the fact that these lenders are usually more flexible with their terms and their lending criteria, provides a good opportunity for construction businesses. Those with a lower credit score, for example, may still be able to access this type of funding.
Bear in mind, however, the interest rates and terms on these loans vary according to the lender, your creditworthiness and the peer-to-peer lending platform you choose. These loans may also have shorter repayment terms, which can require a faster payoff time.
Funding Option 6: Angel Investors
Angel investors are high-net-worth individuals who provide capital in exchange for equity or convertible debt in your construction business. They are a useful resource for your own construction business because they often provide expertise in the construction industry and guidance on business operations. They may also have a network of other investors interested in the construction industry, in case you need additional funding for construction projects.
However, angel investors will require part ownership in your construction company, and it can be difficult to stand out from the crowd who are trying to attract them. With the right business plan and construction projects however, you can get your own construction company and your future projects funded.
Additional Resources
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Find out the latest Construction Loan Rates here. This guide explores what rate you are likely to qualify for.
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