Construction Finance Blueprint with yellow hard hat

Your Construction Finance Blueprint

Posted May 12th, 2020

This construction finance content was produced in partnership with DARE Capital

You are having success building your construction business. You have blueprints for jobs, but a financial blueprint for your company? Not so much.

If your construction business is growing every year, but …

  • your paycheck seems to stay the same;
  • you always feel like cash flow is too tight;
  • and it is stressing you each week to make payroll;

then it is probably because you lack a financial plan that supports your growth. There are very easy (yet not widely known) ways to control your expenses through a cash flow plan. This allows you to finance your growth – and YES, it was created for and is specific to construction.

You need a goal and a plan that will help you reach it. You need to understand your options to acquire capital when you need it, what to spend it on, and how to pay it back without slowing down your momentum.

man using accounting software on a laptop

Accounting: Your Construction Finance Foundation

Solid financial tracking and reporting is the bedrock upon which you will build your company’s future success. Before you can plan for future profit, you need to know exactly where your money is going now. The only way to do that is to clean up your current bookkeeping and accounting practices.

Separate your personal expenses from your business accounts.

Your personal and business checking accounts must be separate and so should the expenses associated with each. This may seem obvious, but too often we see personal and business expenses in one account. For one thing, a merged account is just not professional and is more likely to result in problems for you – whether it is at tax time or if you are trying to get a business loan down the road.

Your company’s ability to build credit is also negatively affected when you blend business and personal spending.

Keeping your business and personal accounts completely separate will save you hours of work and frustration in the long run.

Open a dedicated payroll checking account.

It is common for business owners in construction to operate their entire business from one bank account, but it is not advisable.

One of the biggest reasons for having a dedicated payroll checking account is cash flow management. In construction, the balance of your bank account is rarely the amount of cash you actually have on hand. Those funds are already ear-marked for vendors, suppliers, and overhead costs like rent, utilities, and debt payments. Don’t double-book funds for payroll on Monday only to discover they are gone on Thursday. Keep your payroll safe and you employees paid on time!

A separate payroll account ensures the money you have assigned for your employee’s paychecks is available when those checks are cashed.

Get more payroll tips in our blog, Payroll Tips for Subcontractors

Hire an accountant.

You may think hiring a Certified Public Accountant (CPA) will cost too much money, but the reality is a good accountant will save you from making costly mistakes and allow you to focus on growing your business.

It is good practice to hire an accountant right away, but if your company has more than a few employees, your revenue is growing, and you are juggling multiple jobs, it is definitely time to hire a CPA. A good accountant often pays for themselves in a relatively short amount of time. After all, finances need to be current and accurate for you to stay on top of your accounts and plan for growth.

Know the financial warning signs.

Your company’s financial health is much like your own — it needs regular, preventative check-ups to spot warning signs early. Unfortunately, many business owners are only monitoring one vital statistic when it comes to their business – cash. That’s like assuming you are healthy just because you have a pulse.

Here are the financial warning signs you need to watch out for:

Negative cash flow.

If your business is routinely spending more than it earns, it probably doesn’t matter how much new business you generate. That’s because with each new job, more expenses will come too. A prolonged negative cash flow is a red flag that something is very wrong.

Cash flow is tricky in construction, with a large portion of project costs coming out long before any revenue comes in. This is another reason a CPA with experience in construction finances is so essential for your future growth.

Poor profit margins.

This particular warning sign is common in construction, and sometimes can be solved with a simple bidding adjustment. If you are applying a blanket markup on top of project costs to every bid, you may be starving your company of the essential profits it needs to grow and thrive. The total overhead cost divided by your total revenue is the percent you need to add to bids to properly account for overhead in your future estimates.

Falling profit margins may also signal an increase in costs or a decrease in income. This is a warning sign you need to address immediately. Once profit margin impacts cash flow, other complications arise quickly.

Debt payment performance.

If you are constantly extending your payment dates or missing debt payments entirely, your company should head directly to the financial equivalent of urgent care. An inability to pay your debts on time tells creditors you are in real trouble, which will limit your options of recovery.

Late payment or poor payment performance can also lead to even tighter cash flow constraints because it will reduce your ability to get credit from your suppliers. Having to pay suppliers COD will further limit cash and can then lead to the need for even more long-term debt which will further erode your company’s profits.

Assess your financial foundations.

Before you create a plan to grow your business AND make a profit, you need to know where your company stands financially. In order to get an accurate assessment of your finances, you will need to start with good financial reporting. These are the three reports you need to have on a monthly basis to review your company’s financial standing:

  • A Balance Sheet
  • An Income Statement
  • A Statement of Cash Flow

What are you looking for exactly? Just like health warning signs, there are clear indicators when a business is doing well.

  • Revenue growth year-over-year, if not month-over-month
  • Flat or minimal expense increases as a percentage of revenue
  • Positive cash flow
  • Ability to service your debt payments and overhead expenses
  • A consistent (and hopefully High) overall profit margin
  • Steady new business pipeline
  • High customer retention

If you don’t have all of these right now, don’t worry. Once you identify the weak spots in your financial foundation, you can work to shore them up — either before you launch your plan for growth or at its start. Your CPA can tell you what each of these financial statements mean for you and how you can make adjustments to best impact your business.

Materials List: Your Construction Finance Solutions

One of the most common mistakes business owners make is to view debt as a thing to fear rather than as a tool for growth. The reality is plenty of business owners borrow money not because they need it to survive, but because it is the smartest way to capitalize on an opportunity.

However, financial solutions are not one-size-fits-all. In order to build a financial plan that will support your growth, it is important to use the right funding option for each opportunity. Here is a list of funding sources your company can take advantage of, when it is best to use them, and when it is not.


Cash is king, and everybody loves that feeling of paying for something with cash. Too often, business owners get so hung up on the pride of paying with cash that they forget that cash is king for a reason — it can save you when there are no other options. For this reason, access to your cash is very important for actual emergencies.

There are four critical rules for cash to always keep in mind:

  1. More cash is better than less cash;
  2. Cash now is better than cash later;
  3. Less risky cash is better than more risky cash;
  4. And finally, never run out of cash.

Good for: Ensuring your ability to survive during a pandemic, making sure payroll is covered when your customers pay late, or taking advantage of an opportunity that arises.

Don’t use for: There are no bad uses of cash per say, only when you deplete all your cash.

Selling equity

Equity is the most expensive form of debt so be sure you are getting value for the equity you bring in. That “Value” is not necessarily always a lot of money, but it can be experience and talent in areas of business that you need. You want to avoid “dumb” money, and instead seek equity partners who bring something like industry expertise, access to a customer or set of customers, or have favorable relationships with suppliers.

Good for: Raising cash for working capital to drive the business, pay off high interest debt, bring in expertise that can help your business, or to help fortify your balance sheet.

Line of credit

This is the gold standard for working capital lending. The funds in your LOC can be used for anything, including financing the upfront expenses on a new job. Similar to cash, though, it is important to use your LOC to drive business and fund monthly operations while saving some availability for more critical needs should they ever arise.

The only real downside to a LOC is that is retrospective — it is always 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.

Good for: Working capital. The cash needed on a day to day basis to manage expenses that will otherwise turn into an invoice o your customer (for example: COGS, other material purchases, equipment rental, and payroll).

Don’t use for: Buying Vehicles, equipment, or other capital expenditures that you don’t intent to pay off right away from business operations.

SBA loans

A term loan or working capital line approved and backed by the Small Business Administration is often easier to acquire than a traditional bank only 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 a good sponsor. Working with the right bank to sponsor your SBA loan is very important, as it can impact how they present your business. 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. Not every bank that makes SBA loans are created equal and each of them have different criteria for approval. Just because one bank turns you down for an SBA loan does not mean the SBA turned you down!

The downside to an SBA loan is once your company grows too large, it will no longer qualify.

Good for: Working capital, initial capitalization for your business, acquiring or merging wit another business, refinancing debt.

Invoice factoring

Invoice factoring is common in construction, as it significantly shrinks the 60-90 days between you submitting an invoice and receiving payment. A factoring company will advance you a percentage of the invoiced amount upfront. This makes it a powerful tool to balance out unpredictable cash flow streams, which gives you the chance to fund your project for the next month of the job and reduce the amount of cash needed to operate a project. Having access to more of your cash will allow you to do more projects that fit into your strategic growth initiatives.

The drawback is invoice factoring does not get you funding before a job starts or before you submit an invoice. Many high-performing construction contractor companies use invoice factoring combined with another financing solution, funding growth and keeping the cash flow stream moving positively.

Good for: Project-related expenses and operational overhead associated to the project you invoiced.

Don’t use for: Buying equipment or starting another project, or paying off long term debt (you need profit for that or another form of long term debt).

PO financing

Less common in construction is Purchase Order financing, in which the lender will pay your supplier to fulfill the order. The customer or supplier then pays the PO financing company directly. It deducts its fees and sends any remaining balance to you.

Good for: Cost of Goods Sold (COGS) purchases, other materials.

Merchant cash advances

These “quick-cash” daily debit loans can destroy otherwise profitable and healthy businesses. An MCA repayment involves a daily or weekly draw from your checking account, which can make forecasting your cash flow even harder than before. These daily withdrawals are almost impossible for commercial construction companies to keep up with, especially in the months after a project is completed but the loan is still active.

Think about like this – if you take out a loan today because you are short on cash and the repayment of this loan requires daily or weekly payments, but you only are paid monthly and often times that is even more delayed – then how could you possibly think you will be able to keep up with a daily or weekly payment without the money coming from somewhere else it is needed – like payments to your suppliers, vendors, or employees payroll.

MCAs are very easy to get, but can have devastating long-term effects including bankruptcy and personal credit problems.

Good for: I cannot in good conscience recommend an MCA for a construction company as I have seen way too many devastating things happen to great people.

Mobilization loans

This is a short-term loan that is tied to a specific project. It is meant to cover the upfront costs of launching new work — materials, supplies, labor, bond premiums, etc. When working with a partner such as Mobilization Funding, the repayment plan is aligned to your pay apps, which reduces the overall strain on cash for the business and relieves the stress associated with how you are going to pay for the project related costs. The repayment of the loan is in line with when you are paid for the project so you can pay off the loan as you earn the money.

Good for: Any project related expenses – material, equipment, labor, insurance, etc.

Don’t use for: Purchasing equipment, refinancing other debts

Other options

There are other funding options that work well in the construction industry, such as heavy equipment financing and payroll financing. The best thing for a company owner to do is to find financial partners they trust and lean on them when a new funding question arises.

When you know all the tools at your disposal — what they do and in what circumstances they will work for your business — you can make borrowing decisions that not only protect your company from loss but help bolster its growth.

Grow to New Dimensions

Now that you have a clear and accurate look at your financials and know the different funding solutions you can use to balance cash flow and execute on new work, it is time to set goals for your financial growth.

Setting Financial Goals

Your financial goal can start with a revenue number you want to achieve. For example, “I want my company to be a five-million-dollar business.” But numbers rarely inspire a team, especially when facing the inevitable growing pains that will come with growing your business.

Push a little deeper and give that number a purpose. What will it mean for you and your employees if you grow from a two-million to a five-million-dollar company? A purpose-driven goal is more effective at aligning your entire team, getting everyone on the same page and working toward the same goal.

Make sure the goal is ambitious but achievable and tied to a metric of time so your progress can be measured.

Revenue is important as it’s an indicator of growth. But keep your eye on profitability and set some profitability goals by total number (i.e. $2.5 million in two years) and also as a percentage (i.e. go from 7% net profit to 12% in three years). Sometimes we fall in love with big revenue numbers, but we have to keep our eye on the prize of profit.

Cash Reserves
While this may sound impossible to some people, it’s important to focus on building a cash reserve to weather inevitable (and sometimes absolutely unpredictable) downturns. Have a goal of at least two months’ cash put away. The recent pandemic is likely to encourage companies to build up even more cash reserves. If you can do three, four- or six-months’ cash, that’s great. But start with a small goal – the ability to operate on your own cash for at least one month, or two. Aim to grow it little by little each year. If you are growing each year by 10%, you need to grow that cash reserve by at least 10% to maintain two months’ cash on hand. It’ll help you sleep better at night knowing you can weather a storm.

While this isn’t a financial goal, it’s worth considering having a goal tied to number of customers. A broader base of customers can reduce risk for a company. If a large customer is lost, it helps to have a significant number of other customers with jobs to which workers can be redeployed. It also makes the future a little less risky, because other customers can make up for the shortfall of losing that customer.

A growing customer base can also show a bank another data point of the company’s health when that bank is considering making a loan.

Your Dashboard

Everyone with a car has a dashboard. It tells us how fast we are going, where RPMs are, how much fuel we have, and our oil levels. This is a snapshot of our vehicle’s performance and ability to perform. A company needs a dashboard, as well. There are a handful of numbers that are really important to help manage the business, and they will differ slightly for each company. But generally, they are simple, though not always tracked for growing businesses.

Customer Satisfaction
Given the importance of reputation in construction businesses and services, this is something to keep an eye on. As online reviews have become more commonplace, it is even more important: the better work you do for someone, and the happier you can make them, the more likely you are to gain additional work. The opposite is also true: unhappy customers are likely to tell five other people and hamper the ability to win new jobs. Seek to collect information on customer satisfaction. A simple “Net Promoter Score” (NPS) rating, “How likely are you to recommend others use us?” is a great way to track this.

Market Share
This one may be challenging to gauge given your particular market or niche, but you want to know how you’re doing relative to the competition. This pertains to how much of the available work you would like to have that you are winning.

As we said before, profit is what matters most, and the healthier a company is in other areas on this dashboard, the healthier its profitability. This needs to be tracked over time so owners and managers can determine if the company is getting healthier or weaker, or remaining the same. It is also an indicator of how well jobs and the business are being run. Are you gaining margin as you grow?

Labor Utilization Ratio
It is important to track the utilization of your most important asset. For most companies, that is their people. For others, it might be a piece of equipment. But it is crucial to know how much of our labor is working and how efficiently. Once a company knows this, they can set parameters around what that ratio needs to be. For instance, in one company, they might know that as long as their labor is being used 80% of the time, they’re ok and they will be profitable. But if they fall below 70%, they are in trouble. They may also find that if they get to 90% labor utilization, they must turn away other jobs.

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