Introducing Your Financial Partner to the General Contractor or Owner
Posted April 14th, 2020
In construction finance, many lenders (ourselves included) utilize some type of risk mitigation in order to ensure that the project goes well and that the money lent is protected and will be repaid. Construction, in general, has risks that all parties in the construction process must account for in order to do their jobs properly and achieve the desired outcome. Whether it is a bank lending money to a developer/owner, a government entity spending the tax dollars they collect from their citizens, or a bank lending to a specific company in the construction process (GC or Subcontractor), they all want the project to go well so they can be repaid. The lender you choose — and who you are in the construction process — matters a lot. Each company in the construction process plays a different role and therefore has different risks, needs, and concerns they must manage. The lender for the developer or owner has a different set of circumstances than the lender for the GC, and the lender for the subcontractor has different circumstances than either of the former.
We administer a “funds control approach,” when we make a loan to one of our customers. This means we use a separate and specific “disbursement account” to make sure the money on the project stays on the project, including the proceeds of the loan to our customer. Because the cash from our construction finance loan is provided when the project starts, and before any work is completed and invoiced, it is important to make sure that the money is used for project related expenses. For our customers, the account is in their business’ name, and is used exclusively for disbursements of and payments associated with the project we are funding. Need to pay this week’s payroll on the project? It comes out of the disbursement account. General Contractor sending you a check for work completed? It goes into that same disbursement account.
A funds control approach protects you and the project you are working on, yet many new clients are nervous about it for one simple reason: They don’t want to tell their GC they have a financial partner, even though everyone else in the construction process has one.
We get it. Talking about money on a project can be awkward, stressful, and frustrating. But, it doesn’t have to be.
General Contractors KNOW the truth — that no subcontractor can finance 60-90 days’ worth of work at the beginning of a project without outside funding. We’re talking about hundreds of thousands of dollars for payroll, equipment, insurance, materials, and more, all coming out of the subcontractor’s bank account and with no expectation of making it back for two to three months when work is completed, invoiced and then paid!
In the past, a subcontractor might have had funds from the contract in advance of the project starting or the customer’s bank would often provide the upfront funds a subcontractor needed. That all changed with the Great Recession. So, if funds used to be advanced or provided and now are not, why wouldn’t a subcontractor need and seek out a lender now?
Approach the conversation with confidence. This is business as usual. A construction finance partner is what allows you to execute and perform, which is what the GC cares about most.
Is your company on track to meet your goals for growth? Get “built for growth” with our free strategy. Click here to get the Built for Growth Checklist.
Acknowledge the GC’s Perspective
Just like you, General Contractors must protect their business, the project, and their customer (i.e. mitigate risk). Chances are they have been burned before by subcontractors with bad, or just the wrong, financial partners. When a subcontractor goes under because of crippling Merchant Cash Advance (MCA) daily debit loans, it is the GC who must fill the void. When work slows down because a subcontractor can’t order materials because of bad credit, the GC is the one who has to solve that problem and manage it with their customer.
The best thing you can do is acknowledge their fears and then lay them to rest.
Reassure your General Contractor by explaining who your financial partner is — their credentials, experience, and how their construction finance program works. (If that information doesn’t help your case, you may want to consider a new finance partner in the future.)
Our clients can tell their GCs that our loan is, “ … only for use on this project and can ONLY be used by us to purchase materials, equipment, and to fund the labor needed. This ensures we can get the labor and material needed to maintain our schedule and protect you and the project overall.”
Once you and the GC are on the same page regarding the need for a finance partner, give them their call-to-action. What do they need to do in order to make this work?
Typically, it means payment must be made — check mailed or deposited via wire or ACH — to the specific, funds-control disbursement account. Be sure to tell the GC, “You are still paying ME directly, not a third party and you are not changing your contract with me.”
Frame the Conversation
Framing the conversation is a great way to let your General Contractor feel positively about your finance partner right from the start. Framing a conversation is simple and can be incredibly effective when done right.
Start by thanking them for the opportunity to perform for them. Remind them that they hired you for a reason beyond price.
Then, name the reaction you want them to have. “You will be relieved/excited/happy” are all good examples. When you tell the listener what reaction you expect, they are more likely to receive the message in a way that elicits that response.
The key part of this is you MUST believe it to be a good solution too. It must be a genuine feeling.
Your final message might sound something like this:
“Hi, [GC Name]. Thank you again for the opportunity to work on [Project Name]. My team is excited to get to work, and you will be happy to hear we have lined up the funding needed to get started. Our financial partner, [Financial Partner Name], allows me as a business owner to meet the performance obligations and schedule this project demands and do our best work for you!
[Financial Partner Name] administers a funds control approach to the project. They manage an account exclusively for disbursement of funds during the project. The capital in the account is for use on this project ONLY and is reserved for project-related uses such as purchasing materials, renting equipment, and to fund the labor needed.
[Financial Partner Name] is aligned with our project’s success. This is the secret to how my company is able to perform and succeed.
What does this mean for you? It means you don’t have to worry about stopped work or delays due to cash flow problems and you can rest assured I will get the project done. After all, we know that the great majority of problems on a construction project are due to a lack of cash. I don’t have that problem and it is because of my finance partner relationship.
The only action you need to take is to mail or wire our payments to [Details of Funds Controlled Account]. Don’t worry — the checks are written out to me. I am not selling my invoices and you are not paying a 3rd party. The checks simply have to go to this address.
Thanks again. Let’s get to work!”
You can see how the message above thanks the GC, names the emotion, and reminds the GC why a financial partner is needed — so you can do your “best work!”
Construction Finance Takes Teamwork
Like everything else in construction, it takes teamwork to finance a project. When you introduce your financial partner as another key member in the project’s success, your GC can view them as an ally rather than a headache.
And if you continue to perform, meet deadlines, and exceed expectations, then your ability to secure funding can raise your reputation as a dependable business partner and help you win even more business. Now that’s teamwork.
If you found this blog helpful and informative, you may also enjoy our newsletter. Click here to subscribe and get more tools and resources sent directly to your inbox every two weeks.