“You’re either growing or you’re dying” is a popular business idiom. For some companies to grow, they rely mainly on customer referrals and organic market growth. For everyone else, you either need to generate more leads, capitalize on bigger opportunities, or some mixture of both.
Here’s another business quote, “You have to spend money to make money.” In order to execute a lead generation strategy or say YES to the next big job, you will need extra capital. Borrowing capital makes a lot of business owners nervous, especially in cash-flow volatile industries like construction and manufacturing. We wrote this article to show you how to borrow money the smart way in order to grow your business.
Know WHY you are borrowing and for WHAT.
Do you need a short-term loan in order to take advantage of a supplier’s discount, or an influx of cash to move forward on a new location or launch a new service line? Knowing WHY you need the money — the goal behind WHAT the loan is expected to do for you — can help determine which funding option is right for you.
Are you borrowing capital to fund a marketing or advertising strategy? Make sure you have clear goals around the campaign. Ultimately, the new leads generated by your marketing should more than cover the cost of the loan. Marketing is a long-term investment, so your funding options should have longer payback schedules.
Are you ready to take on a larger project, but need funds to cover the first few months of work? Commercial construction subcontractors often need a cash flow boost when they mobilize on a new job. It’s just the nature of the industry. This kind of short-term need benefits from short-term funding options that can be paid back once you start getting paid for the job.
At the end of the day loans for existing businesses fall into two categories:
Loans for tangible investments, like property, vehicles, or equipment. This is used for items you need and can pay off using the existing cash flow of the business. In other words, your business should be able to handle the monthly payment of the loan.
Working Capital Loans allow your business to take on existing work and are needed when certain costs are incurred by the business that fall outside of when you are paid by your customers. If you need money to purchase materials or pay for labor associated to existing work you have not been able to invoice or be paid for yet, this would be the loan for you.
Only borrow what you need.
When lending partners tell you how much they could loan to you, it can be hard to walk that number back. Think of all the things you could do with all that money, right? Wrong. Borrowing more than you need is a great way to increase your company’s debt right when you’re trying to grow.
Figure out exactly how much you need to accomplish the goal you identified previously. Borrow that much and no more. Remember, if you need cash later it will be easier to get if you have successfully paid back your first loan.
Getting more money than you need and therefore using the wrong type of loan to pay for the wrong items will put your business in jeopardy if something goes wrong.
Research your funding options.
Every funding option has advantages and drawbacks. It’s important to do your research and choose the one that best works for your company and your business goal. A daily debit or Merchant Cash Advance (MCA) may seem like the perfect “quick cash fix” for your short-term growth goal, but they come with a host of challenges for commercial construction companies. Here is a “cheat sheet” of the common funding options to get you started.
Small Business Loans are one of the most traditional form of small business funding. Whether you secure your loan through a bank or a lending partner, most small business loans have competitive interest rates — fixed or variable — and a set repayment schedule. They require a strong credit score and collateral to back up the loan in order to qualify. Since the Great Recession, it has become significantly harder for companies in industries like construction and manufacturing to qualify for traditional loans like these. These loans will rely heavily on your personal credit.
SBA Loans are small business loans of which up to 80% of the principal of the loan is guaranteed by the Small Business Administration. This reduces the lender’s risk and opens new funding opportunities for small business owners. The requirements for an SBA loan are similar to a small business loan, with the addition of your business qualifying as a small business according to the SBA. These loans also will rely on your personal credit and have a minimum credit score requirement of 650.
Commercial Credit is a pre-approved amount issued by the bank or lending partner that your company can access at any time. Commercial credit is often used to cover unexpected costs or to take advantage of a sudden business opportunity.
Working Capital Loans cover a company’s routine operational expenses such as payroll, rent, or debt payments. This type of loan is good for companies that experience uneven or cyclical cash flow cycles. For example, many manufacturing companies need short-term funding during the fourth quarter, when their customers are focused on selling the goods already made. The manufacturing companies repay the debt in the spring and summer, when orders pick back up.
Invoice Factoring is commonly used in commercial construction and manufacturing. The factoring company works directly with your GC or customer to verify an invoice is accurate and owed to you, then you are advanced up to 80% of the invoice amount. When the factoring company receives payment for the invoice, it repays itself the amount advanced to you, plus a fee. Any remaining balance is sent to you. This is a good option when you have invoiced your customer already and are just waiting for your customers to pay you, but they are not paying fast enough. This is not good if you need cash before you are able to create the invoice.
Purchase Order Financing is like invoice factoring. The PO financing company will pay your supplier to fulfill the order. The customer pays the PO financing company directly. It deducts its fees and sends any remaining balance to you.
It’s important to note that in both Invoice Factoring and PO Financing situations, the lender is most often directly involved with your General Contractors, customers, suppliers, and vendors.
Merchant Cash Advances (aka Daily Debit Loans) are “quick-cash” solutions designed for industries with a daily cash flow cycle, such as food and hospitality or retail. MCA repayment involves a daily or weekly draw from your checking account, which can make forecasting your cash flow even harder than before. While MCAs work in industries like hospitality or retail — where a daily cash flow can potentially meet or exceed the daily debit — it is almost impossible for commercial construction companies to keep up, especially in the months after a project is completed but the loan is still active.
MCA loans are very easy to get and can be deposited in your account within days which make them very tempting to take on. However, like most things that are easy they can come with some significant drawbacks. Anytime the repayment cycle of your loan does not fall in line with how your revenue is realized you will likely have a problem. When those problems come the solution is NOT TO TAKE ON ANOTHER ONE!
Borrow capital to grow.
Once you have identified the goal of your funds and the potential funding sources, it is time to make sure you and your company are ready to capitalize and mobilize. Forgive us one more aspirational quote, “When opportunity knocks, be ready to open the door.”
What do you need to do to maximize the potential benefit this influx of cash could give your business?
- Make a game plan for the funds based on your goal.
- Get your business and personal financials in order. That includes credit reports and tax returns.
- Establish relationships with other partners and vendors. If any of them can cut you a deal if you act quickly, that can be part of your funding strategy.
- Talk to the experts about your funding options and YOUR unique business needs.
Growing with Mobilization Funding.
If you are a commercial construction subcontractor or manufacturing company looking for a funding partner who can help you grow and succeed — you’re in the right place. We have structured our lending platform and services to serve the unique cash flow cycles of your industries. We work WITH you to create the unique lending solution that works FOR you.
You can apply online here, or give us a call at 813-712-3073. (Don’t worry — a real person will answer the phone and be ready to help you.)
If you enjoyed this article, we think you’ll love our newsletter. Click here to subscribe and you’ll receive business strategies, leadership advice, and the motivation to crush your goals — delivered right to your inbox!