Types of Construction Financing and How They Impact Your Ability to Grow
Posted March 26th, 2020
Our CEO Scott Peper recently joined the good folks at Levelset for a webinar on construction financing and how your funding choice could impact your ability to get paid. If you missed the webinar, you can catch a recording here.
We have already listed out the many types of construction financing available to contractors — the good, the bad, and the ugly. Let’s dig into how each of them can help, or harm, your ability to grow your business.
Bank Line of Credit
This is the gold standard in lending. If you have a bank line of credit, your company has solid financials and a proven track record of performance. You can use the money for anything, including financing the upfront expenses on a new job. The downside is this: The size of your Line of Credit is determined by your past 24 months financial performance, not the next 24 months.
If you are growing fast, you may outgrow your line of credit.
These are often easier to acquire than a bank line of credit, IF you qualify as a small business. For commercial construction, the SBA defines a small business as one with no more than $39.5 million in average receipts. SBA loans require a LOT of documentation, and you need to find the right sponsor (i.e bank) to make it happen. The biggest downside in terms of growth is that once you hit the cap, you no longer qualify.
***Important to Know*** Not all SBA loans, or banks that provide them, are the same! Finding the right bank to sponsor your SBA loan is very important and how they present your business is critical as well as how you present to them. The bank is still taking a risk on your SBA loan and their assessment of your business and the perceived credit risk is just as critical to the approval process.
While invoice factoring shrinks the time between when you invoice and when you get paid, it doesn’t get you funding before the work starts. And while financing your company between payments is absolutely a normal part of the construction industry, many General Contractors have a negative perception of factoring.
Hesitant to talk to your GC about payment and financing? Read this blog next: Why Subcontractors Need to Talk About Slow Payments with General Contractors.
Invoice factoring CAN help you grow. Done right, it can balance out your unpredictable cash flow, which gives you a chance to fund more strategic growth initiatives.
Asset-Based Lines of Credit
Like invoice factoring, an ABL line of credit can regulate cash flow by speeding up the time between invoice and payment. This allows you to have more cash in hand to invest in growth opportunities.
For both invoice factoring and ABL credit, you need to make sure you aren’t paying for future growth with money you need for present demands. This is one reason we recommend setting up a dedicated payroll checking account, keeping your Operations account for just operations of the business.
Merchant Cash Advances
These have nearly ZERO benefit to construction contractor’s plans for growth. In fact, these high-risk cash advances can destroy your ability to get paid for the job you’re on now and crush any dreams of future growth.
Don’t believe us? Here’s a quick story: A commercial glazier in Texas had a healthy balance sheet and a line of credit at his local bank. The line of credit had been in place for years, and was a little too small, but they were making due and all signs pointed to continued success.
Until there was a delay on a project, which resulted in a cash shortage. The owner needed to make payroll, so he found a quick and “easy” solution — a Merchant Cash Advance. And when he couldn’t keep up with the daily payments, he got another.
He almost went bankrupt. He almost lost everything.
Merchant cash advances don’t work for construction companies. Need more proof, read this next: The Guide to Merchant Cash Advances.
Our construction financing program is built to help you grow. You can confidently bid on bigger projects because you know you won’t have to finance the labor out of your own pocket. A financial capability letter can greatly improve the strength of your bid, winning you more work.
We work with our clients to align our repayment plan to their pay apps, minimizing the strain of repaying a loan on top of managing your business. Finally, we have a network of experts in industries like insurance, legal, equipment, and more who are ready to help when one of our clients has a question.
If you are interested and would like to learn more, check out How Our Commercial Loan Process Works.
Having the right construction finance partner behind your growth can help you streamline your cash flow and boost your company’s financial health. That allows you to focus on PERFORMANCE — making sure your team has the tools, equipment, training, and resources it needs to do great work. A history of great work boosts your reputation with General Contractors, which puts you in a better position to negotiate new contracts.
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