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Even with careful planning and a phenomenal team, cash flow struggles are all too common in the construction industry. Long payment cycles are often the culprit, and contractors shoulder the burden of maintaining a healthy cash flow and balance sheet. When there is a delay in project payments, those with limited working capital instantly feel the financial strain. Operating in financial uncertainty also influences how they mobilize new projects and jeopardizes their ability to take on larger jobs.

Construction financing can alleviate these concerns, and there are several options for contractors to explore. With their focus fixed on keeping the business moving forward, they weigh the pros and cons of various financing avenues. The financing that is a fit for the contractor depends on the type of expense (short term or long term) and the impact the payment terms will have on the business.

1. Bank Financing

A line of credit from a financial institution often comes with an attractive interest rate and the opportunity to borrow more over time. However, during the application process, the odds may seem stacked against contractors. The nature of contracting doesn’t always paint a promising picture, raising concerns from the lender. A few potential red flags from the lender’s perspective include a sparse business credit history, limited assets and a weak balance sheet. Should a contractor get the green light, there is often a significant disadvantage: a blanket lien on the business. If the contractor finds themselves in the unfortunate position of defaulting on the loan, their assets could be in jeopardy. They will also want to pay special attention to the terms and conditions—a breach of the loan covenant may give the bank the authority to claim the loan in full.

2. Credit Cards

Applying for a credit card is less of a lift for business owners who are already short on time. The promise of perks in the form of rewards and benefit programs is also appealing. For contractors with limited credit history, a credit card is one route to build their credit. While fewer hurdles and rewards points are a plus, putting larger or long-term expenses on a credit card limits the amount that is left. Putting everyday, short-term expenses on a credit card makes more sense since contractors will want to pay off the balance within 30 days. Should a business owner decide a credit card is right for them, they’ll want to watch out for hidden fees and be mindful of interest rates.

3. Invoice Factoring

Although invoice factoring is different from a loan, it is one way to finance business operations. Here’s how it works: a contractor sells their accounts receivables to a third party at a discount and receives the necessary funds to pay outstanding invoices. One caveat: contractors will need to show they’ve done the work for advance payments to be processed. A downside to invoice factoring that keeps many contractors away is losing control over communication with the general contractor. The general contractor may see a contractor using invoice factoring as one who is in a compromised financial position.

4. Material Financing

In material financing, a contractor’s material finance partner pays the supplier upfront for materials and then extends the contractor the ability to pay when paid, or up to 120-day credit terms. Unlike invoice factoring, the financing happens before work begins, and payment goes directly to the supplier. A plus with material financing is the freedom to buy project materials upfront; the 120-day terms are also appealing. In addition, many suppliers offer cash pricing discounts, typically saving the contractor anywhere from 2% to 5%. When reviewing material financing options, contractors should seek out a financing partner that takes their personal and business experience, project pipeline and previous purchase history into consideration. Choosing the right financing partner could also mean a contractor can handle larger, more complex projects.

5. Alternative Financing

FinTech lending is on the rise with the promise of fast approvals and quick access to funds. As with credit cards, the application process is less cumbersome than other financing methods. Another plus: the contractor may not need to provide collateral. Contractors may find the dollar amounts offered are lower than they hoped, and interest rates may be high. Also worth noting: FinTech isn’t designed specifically for the construction industry.

Preparing for Cash-Flow Hurdles

A critical component to any contractor’s business is access to capital. Without it, day-to-day operations are under threat, and plans to grow come to a disorienting halt. Prioritizing getting approved for financing will provide a layer of security when things inevitably take a turn.


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