As a contractor, completing a construction project can be very expensive. In fact, this business is often referred to as a feast or famine business. Many clients will pay for the job once it’s completed or after completing a milestone. That means your business will have to pay for every expense out of its own bank account to reach each milestone. However, you can minimize how deep you dive into your pocket with the help of a proper financing plan. This is usually the best way of undertaking a project, as many successful contracting companies will say.
There are several reasons why it is better for your construction business to seek funding rather than pay for the work itself. Here are some to consider the next time your company lands a job.
Every project will have direct costs that include paying wages, insurance costs, and materials. When you’re handling a large project, the expenses can be quite high, especially for a smaller company. Nevertheless, the job must get done, and this can have a serious strain on the company’s cash flow since most payments for jobs do not come upfront. On a company’s account records, the payment will be listed as accounts receivable, but that won’t provide the immediate cash needed to buy materials and pay regular wages. To avoid any negative impact on the cash flow that may disable operations, seek funding to provide the immediate cash needed for expenses.
As mentioned before, the construction business is heavily dependent on the season, and business can swing in or against your favor. For instance, a recession makes jobs scarce, but so can other factors such as weather, location, etc. Because of this nature of the business, it is never advisable to commit too much of the company’s resources into a project when expected payment may be a long way down the road. With funding, though, your company can always weather tough seasons because there will always be a bit more fuel left in the tank for other projects.
While a company will usually be able to cover the high cost associated with buying construction equipment and/or vehicles. This is when financing comes in handy to help with the purchase of these assets without taking a huge toll on cash flow. Instead of paying for the asset upfront, equipment financing helps to spread out the cost of the equipment over a longer period of time.
Both lenders and contractors understand the need for funding, so the two make a perfect match. Lenders have therefore made various construction business loans available to contractors, and these are some you can check out.
Getting a business loan from a bank can be very difficult because of the high requirements and time it takes before approval. Small construction companies have an even tougher time because lenders are wary of the inconsistent nature of the business. Unsecured business loans are meant to reduce the hurdles businesses go through by eliminating the need for collateral. To qualify for this funding option, your company needs only to have been in business for more than six months and have made at least $10,000 in monthly sales during that time. Lenders will then analyze cash flow and revenue based on these factors to determine how much to lend your business.
Unlike a business loan, a line of credit works on a revolving credit. Revolving credit is much like a credit card because a lump sum is not deposited into the business bank account. Instead, your business will receive a maximum approval amount that can be requested at any time. When a need arises, your business can request the required amount, and it will be deposited into the business bank account.
The advantage of a line of credit over a business loan is that your business only requests and pays for what it needs. In this way, you will not have to pay back the funds granted with interest that you didn’t need. Furthermore, the repayment period can be between 6 and 12 months as the project requires.
This basically refers to the selling of your business’ accounts receivable to a factor. For example, a company may have invoiced its customer $20,000 and is expected to be paid in 60 days. The company might have an urgent need for cash for expenses and thus sells the accounts receivable to a factor, which funds the company with, say, 80% of the invoice amount. Once the customer pays the invoice, the factor received the payment, subtracts its costs, and sends the rest to the company’s account.
Many businesses prefer invoice factoring for funding because it receives immediate cash for expenses and other needs. Furthermore, the factor takes the responsibility of collecting the payment from the customer, which helps to ensure prompt payment.
Usually, equipment is used as collateral by lenders before providing funding to a company. Equipment financing is unique because the lender provides funding for equipment, and the equipment itself is used as collateral. This is possible through an ECC filing that collateralizes the equipment being financed. Compared to equipment leasing, this form of funding leaves the asset in the possession of the company to be used even after the loan is paid off.
In short, there are many funding options available for contractors and construction-related industries. Everything depends on what your objectives are for your business.