Autumn Sullivan, Author at Mobilization Funding

Due to the inconsistent nature of commercial construction, it is essential to build a healthy profit margin into each of your projects, and to know what the breakeven point is that will determine whether each job ultimately finishes with a profit or a loss. The key is to properly run the numbers, being as specific as possible with your job costing, overhead costs and the project’s payment schedule.

Is your commercial construction business profitable? For many commercial construction companies, the answer is “Yes, I think so!”

It can be stressful to take a full look behind the curtain of your finances, especially if you are worried that your profit margin is thin or non-existent. But identifying red flags is important to preventing job delays, payroll shortfalls or as the owner, finding yourself unable to take home a paycheck.

Note: Whether you’re starting from scratch or taking a fresh look at your finances, user-friendly accounting software such as QuickBooks can simplify the process as you estimate and track your costs.

Step 1: Tally Job Costs

The first step in calculating profit margin for your commercial construction project is to generate a list of your job costs, including:

– Materials
– Payroll – (Direct labor and Subcontract labor)
– Bond premium
– Permitting
– Equipment

Job costs should be broken down for each project and then married up to the job’s overall schedule and built into your business’ budget and cash flow planning. Make a note of when you will need to order some of those materials (lead times can be long for some things), when you will be invoicing for those materials and labor, and how long until you will be paid. Be sure to account for retainage.

Step 2: Verify overhead

To calculate your business’s overhead, generate a list of all bills and expenses outside of your job costs that are needed for your business to operate. These typically include:

– Rent or mortgage payments
– Payroll for office-based support staff
– Insurance (General Liability, Workers Comp, Vehicle, etc.)
– Company vehicle payments
– Website costs
– Phone bill(s)
– Owner Salary
– Outstanding debt payments

Overhead should be broken down on an annual and then monthly basis so that the costs can be included in your bids for new projects. For example, if your annual overhead costs are $100,000 and you have one contract that will be your primary source of revenue for six months, you should add $50,000 to your bid amount to account for overhead during that time.

Step 3: Crunch the numbers

Using your bid amount and the values you calculated in Step 1 and Step 2, complete the following formula to see your net profit and margin:

calculate markup formula

Questions about estimating markup and profit margin? Check out our free guide!
Download a free copy of Margin versus Markup.

Step 4: Look for Improvements

Don’t stop at the first calculation. Knowing that delays and other issues may arise, rework the numbers until you are confident in your bid amount. Again, knowing where your breakeven point is on the job will allow you to know what type of delays and / or other issues you can handle and still be profitable.

Having a complete understanding of your profit margin can allow you to make adjustments that allow your business to function better, such as negotiating better payment terms or lower retainage with your general contractor. In turn, that means getting out of debt, confidently investing in new equipment, hiring more qualified employees, and bringing home a steady paycheck for yourself.

Step 5: Rinse and Repeat!

This process should be standard for each of your jobs, and the numbers should be revised and adjusted as each project progresses. Inevitably, some projects will be delayed or drawn out, unforeseen expenses may arise, or perhaps your estimates were off in some way. The more you get into the habit of working through the numbers and recalibrating your bid estimates, the better you will get at it, and the better your business will operate.

Are you still unsure of your profit margin, or are you in need of additional capital to fill the gap before you receive payment on the job? Mobilization Funding’s knowledgeable team of experts can help. Contact us today for a free consultation.

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Funding for Real Estate

Do you need to purchase a new space for your business to operate? Or is your current property in need of renovations and/or an expansion?

Finding a real estate loan can be a challenging and arduous process. Often credit scores for both the business and individual owner(s) are important factors in being approved for a real estate loan.

Often these are term loans, such as a Business Mortgage Loan or a Business Construction Loan. Like a home mortgage, these are long-term loans repaid over a period of between 5 and 20 years. There are some lenders who can issue Immediate Term loans to purchase or develop the property with repayment limited to two years or less.

Real estate loans often require a certain Loan-to-Value Ratio, which is the amount of the mortgage divided by the appraised value of the property. The higher the Loan-to-Value Ratio, the more difficult it will be to qualify and the more expensive the loan will cost. In order to offset that ratio, a down payment is often necessary. In addition, the lender will require a lien or other forms of security on the property.

Types of Business Real Estate Funding:

CDC/504 SBA Loan is another government-backed loan, the 504 SBA Loan must be issued through one of over 260 Certified Development Companies (CDC’s) and are almost exclusively designed for fixed assets, such as a real estate purchase or renovation.

While not restricted to real estate, an SBA 7(a) loan guarantee can function as a Business Mortgage Loan backed by the Federal Government’s Small Business Association. SBA 7(a) loans are up to $5 million and can cover up to 90% of the property’s value.

Hard Money Loan or Commercial Bridge Loans are types of short-term funding that allow a business to buy or fix commercial property before refinancing to long-term mortgage. Interest rates are typically between 8% and 13%, but also come with additional fees that often include closing costs.

Traditional Business Mortgages are in many ways similar to a residential mortgage. The big difference is that a Business Mortgage can only be made for commercial properties, which are those that generate income and are often zoned that way. As a residential mortgage, business mortgages require a down payment and are then paid off in equal monthly installments spread out over the mortgage’s term.

Tip: Your town, city or state may have an economic development office with programs to help your manufacturing finance efforts. That may involve a program to cover the cost of your down payment, or grants to help upgrade machinery or training.

Equipment or Machinery

Equipment and Machinery Financing can be split into two categories: Rent/Leasing or Equipment Loans.

Renting, Leasing and Equipment loans are common options when shopping for heavy machinery and equipment. The big difference is that a rental or lease agreement is one in which you agree to pay for the use of another company’s property. Meanwhile, a Term Equipment Loan is for the title and ownership of the equipment or machinery. Both types frequently require a down payment and then equal monthly payments for a set period of time.

Where to get them: Term Equipment Loans are offered by a host of different lenders, from large banks to your equipment dealer, local credit unions and alternative lenders. Interest rate and terms are often dependent on your personal and business credit history, and most lenders place a lien on the equipment or machine as collateral.

Cash Flow Shortages

Outside of real estate and big equipment purchases, there are countless reasons additional manufacturing finance efforts would be needed to better manage cash flow.

Cash flow refers to the funds coming in (revenue) and going out (costs). It is inevitable for a business to find itself in a cash flow pinch at some point when revenue falls short of costs and expenses. These cash flow pinches can be caused by accelerated growth in the business, a slow-paying customer, unexpected expenses, natural disasters, or a ramp-up in business where you need to increase labor or make a big material order. But at the end of the day, the mortgage or rent still needs to be paid, payroll needs to be met, and materials ordered.

Many businesses use multiple strategies to overcome cash flow pinches without taking out a loan. Those include:

Negotiate with customers to get a partial payment up-front.
Ensure the business has cash reserves in place to get through slow periods
Communicate with material suppliers or vendors to secure extended payment terms, allowing more time to pay invoices.
Say no to new revenue opportunities – turning down new business is not what owners typically like to do!
Sell equity in the business to a new partner who will provide the needed funds.
TIP: Selling equity is the most expensive type of funding you can ever take out, as it is permanent.

Line of Credit for a Manufacturing Business

If those efforts still won’t cut it, manufacturing business owners should turn to a local credit union or traditional bank and apply for a Traditional Bank Line of Credit. That will allow the business to borrow as needed up to a certain amount (called a Credit Limit) and then make at least the minimum monthly payment until you have the funds to pay it off.

Lines of Credit from a traditional bank or credit union generally have lower interest rates than if secured through an alternative lender, and the business only pays interest on the amount borrowed at one time.

Work In Progress (WIP) Financing

Another option for businesses is to finance their raw material and labor costs associated with the production of orders, referred to as Work In Progress (WIP) Financing. In this loan option, the lender will purchase the needed materials on behalf of the business, which will then create the product. Upon delivery of the product, the customer will pay the lender, which will deduct the cost of the materials plus the interest and financing fees, and then pay the remaining balance to the business. This allows the business to grow and fulfill orders while financing that growth with a portion of their gross margin on the order versus their overall business. This product can also be referred to as Purchase Order (PO) Financing, however, each is slightly different depending on the type of business and its needs.

Factoring

If a cash flow pinch occurs at the end of the production cycle and outside funding is needed while the business waits on payment for a particular invoice, a good option is to Factor that receivable.

Factoring is when a receivable or invoice is purchased by the factoring company via a direct Assignment of that receivable or invoice from the companies’ customer (referred to as an Account Debtor). The factoring company will advance anywhere between 60% and 90% of the verified invoice amount to the business, and when the factoring company receives payment from the Account Debtor, it will deduct the amount of the advance, plus interest and fees, then send the remaining portion to the business.

Tip: Be aware of the specific terms of the Factoring Agreement. Some companies will charge a flat fee per month (1 – 4%) if the invoice is paid within 30 days, but can go up significantly after 30 days if the payment from the Account Debtor has not been paid yet. If your customer takes too long to pay, that rate hike can be a major dip into your profit margin on the job.

Learn more about how to calculate your true profit margin

Merchant Cash Advance (MCA)

Merchant Cash Advances (MCAs) are offered by many alternative lending companies around the country. While not specific to manufacturing, MCAs are available to companies that do not necessarily qualify for other lending products.

MCAs are available based almost exclusively on the amount of cash/deposits flowing through the business bank accounts. Funds are generally issued as a lump sum and then the funding provider will begin making daily, weekly or monthly automatic withdrawals (via ACH) from the business account until the receivable advance is paid in full, including all fees and interest.

Typically, MCAs cannot be paid off early. Since this product is a purchase of future receivables typically the entire amount must be paid off in full regardless if the Merchant wants to pay it earlier than the scheduled term.

Funding for Your Manufacturing Business

Whatever type of funding you are looking for, Mobilization Funding is here to help. Our experienced team of professionals can help you to identify the right program or loan to help your manufacturing business achieve its goals, either through our lending program or through one of our trusted funding partners. Contact us today for a free consultation and we’ll help you find the best fit for your business.

Recommended Reading

How To Get a Manufacturing Business…

Manufacturing is an essential part of the American economy, supporting 8.5% of the country’s workforce. Of the nearly 252,000 businesses that work in manufacturing, 75% of them have less than 20 employees, according to the National Association of Manufacturers. For many small businesses, it can be difficult to find a loan, whether through a bank, the Small Business Association, or alternative lenders offering cash advances loans or factoring lines. And this is doubly true when it comes to a manufacturing business loan.

Without the dollars they need, even established manufacturing companies struggle to overcome shortfalls to their cash flow. Many make up for it by delaying payment to vendors, passing on good jobs, holding off on hiring, or going into debt.

Mobilization Funding’s Manufacturing Business Loan

Unlike other lending programs, Mobilization Funding is available for businesses before they invoice for their products. With the capital they need on hand, they can order raw materials, make payroll, negotiate better terms with their suppliers, and function more smoothly overall.

Here’s how it works:

1. Receive an order.
2. Mobilization Funding will review the purchase order or contract and build a repayment structure to match up with your cash flow and work schedule.
3. Once approved, complete the required paperwork.
4. Loan is funded!
5. Order materials, pay labor, cover shipping costs, etc.
6. Deliver products.
7. Upon payment for order, the loan is repaid.

A Mobilization Funding Work in Progress loan is one option for manufacturing businesses that have been operating for at least two years and need up-front capital to order raw materials, pay for equipment, or cover other expenses like labor and shipping.

The approval process typically takes about five business days, and there’s no penalty for an early payment. And yes, you can have several orders with different clients.

Hiring an accountant can save you time

Hesitant? Consider how much time you currently spend per week on payroll, sending out checks and keeping your accounts in order. What else could you be doing with that time? And how many times has something slipped through the cracks—like a late payment to a vendor or the IRS? Even once is enough to prove why hiring a CPA is a good idea.

A construction accountant can organize your company’s financial documents

No matter the industry, there are a handful of basic financial records that your company should maintain and pay attention to in order to operate efficiently. These barometers will reveal whether your company is making a profit or operating at a loss.

If you don’t know where your company’s financial information — like monthly accounts payable, accounts receivable, quarterly Balance Sheets, Profit and Loss Statements and other standard financial reports — are kept, or if they’re out-of-date or not organized, the right accountant may be your company’s new MVP.

Beyond creating an orderly archive of financial documents, a bookkeeper or CPA can dig into those numbers to identify strategies that can improve your company’s profit margin, eliminate debt, invest in future growth opportunities through strategies like increasing your prices, reducing overhead, or making other changes to your day-to-day operations.

Pay your taxes correctly and on time

Filing and paying taxes in a timely, consistent manner is an unavoidable piece of running a legitimate business. And the risks of incorrectly processing that paperwork are numerous and costly. Failure to do so can result in expensive fees by the IRS, plus automatic draws from your account to repay any unpaid taxes. An accountant will keep you in the IRS’ good graces.

Avoid costly overdraft and other avoidable bank fees

Bank and overdraft fees is not only a slow leak on your company’s bottom line — they’re also a tell-tale sign of financial problems. These fees and the underlying issues causing them (lack of organization, communication problems, etc.) will likely prevent you from qualifying for lines of credit or low-interest loans in the future. If this is a reoccurring issue, consider it a clear sign that you need help managing your cash flow.

An accountant can improve your business growth strategy

Are you passing up on growth opportunities due to a lack of capital? If your business has been approached to take on larger or more lucrative projects but you have turned them down due to financial uncertainty or issues with debt, it is likely time to find a financial expert who can help you to better direct your company to the right track.

How to find the right construction accountant

If you are reading this article, then by now you know it is time to take action. The next step is finding the right person for your business. Here are a few pointers:

1. Research candidates online. There are many websites dedicated to connecting employers and job seekers, such as ZipRecruiter.com, Glassdoor.com or even LinkedIn. Simply enter your qualifications (feel free to compare the requirements of similar businesses) and connect with local applicants.

2. Enlist help from a staffing agency. A temporary staffing agency in your area can place an experienced person with the right qualifications for a temporary amount of time, permanently, or a temp-to-permanent arrangement. While they charge a premium rate, this may be the best option for a business owner who doesn’t have time to weed through applications, order background checks or conduct initial interviews.

3. Reach out to trade associations. Your local chapter of the Associated Builders & Contractors (ABC) or similar agency like the Construction Financial Management Association may be able to connect you with viable candidates who is familiar the construction industry and would best fit your needs.

The bottom line: Your commercial construction business needs, and you deserve, a financial expert’s help.

You should be doing what you do best: focusing on growing your company and properly completing your jobs on time and on budget. Company owners are often reluctant to let go of finances, but the truth is that construction accountants understand your industry and are trained to look for inefficiencies, find other lending options, and help you to more efficiently run your company. Just remember that as the business owner, you should continue to review your financial position with your accountant on a regular basis.

Is your business getting ready to bid on your next big project? Contact us today for a free business consultation or click here to learn about how a financial capability letter could help give you a leg up on the competition.

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Applying for commercial construction financing

The first step in securing almost any type of funding is to complete an application with the lending institution. The important thing to know here is that application formats can vary. Some lenders, like us, only require a single-page application that can be filled out in no time. Others, like those that offer government-backed SBA loans, can require many separate forms totaling dozens of pages that take you (and an accountant) weeks to properly prepare.

At a minimum, applications for commercial construction loans typically ask for the following:

Business name, address, phone number and Federal Tax ID number.
Details about the business owners (name, contact info, marital status etc.).
Work history, including amount of time in business, scope of work and references.
If you have any current legal judgments or liens against the business or the business owners.

For more information about financial planning, bidding strategies and project management for your commercial construction company, download our free e-book.

Commercial construction loan documentation

Once your application is complete, you’ll need to submit the supporting documentation. This step varies greatly depending on the lender and type of financing, but generally ties in with the requirements of the application.

Here’s what we require:

4 Most Recent Bank Statements
Year-End Income Statement & Balance Sheet for Past Two Years
Year-to-Date Income Statement & Balance Sheet
Tax Returns for the Last Two Years
Copy of your Contract

Most will also request professional licenses or government filings of your business, such as:

Contractor’s or trade license for the state you are working in
IRS Form stating your business’s Federal EIN Number.
Articles of Incorporation

You can learn more about commercial construction financing here. If you found this information helpful, don’t miss our bi-weekly newsletter, Built for Growth. Click here to subscribe.

Answer 3 easy questions to start your application

Regular invoicing ensures that checks continue to flow in from your client.

Payment delays in the construction industry are a persistent problem. If you want to be paid consistently and on time, you need to be billing consistently and on time. This removes confusion that could occur with the general contractor.

Delaying commercial construction billing also delays invoice approval.

Double paying a contractor is a major concern for property owners and general contractors. Skipping some months and rolling them into one large bill often results in more scrutiny from the general contractor or project owner, slowing down the approval and payment process.

Keep your contract rights in order with scheduled billing.

Depending on the state, not submitting a pay application can result in a loss of your lien rights, or other contractual obligations.

Interruptions in receivables impacts cash flow.

No matter how insignificant a pay application may seem, incoming receivables can be used to pay job costs or operating expenses. Also, if you are working on multiple jobs those dollars can add up to more than expected. After all, your fixed overhead expenses don’t go away.

Delays in billing put more of your receivables at risk of non-payment.

Delaying billing leaves more of your needed capital on the line if a worst case scenario arises, such as the project falling through.

Mobilization Funding can help you avoid stretching your resources too thin. Our a unique lending program can help your company better manage its cash flow throughout the ups and downs of a job. Contact us to get started.

Commercial construction companies need outside funding

Without the ability to secure financing, construction companies have to self-fund all of their project expenses out of pocket. Just in the first 30, 60 or 90 days of a job, a commercial construction company needs enough money on hand to cover the project’s expenses, including pricey bond premiums, plus labor and materials costs.

For short-term projects, the company may need to complete all the work before it can bill for the payment. And if the general contractor or project owner does not pay, it could take years for the business to recover.

This reality limits how many people a company can hire, supplies and materials they can order and equipment they can use. Everything is controlled by how much cash they have on hand.

And in an industry notorious for late payments and razor-thin margins, the risk is particularly high. It can take business owners years to build up a war chest that is sufficient to take on larger and more valuable projects. That, in turn, puts a huge strain on the companies who would want to hire them.

The trouble with traditional lending for commercial construction companies

The trouble with many funding options, however, is that the commercial construction industry has its own complex set of rules, regulations and standards. Lien rights, retention and the bonding system are nearly exclusive to construction and are misunderstood by most lenders.

Even though payment terms are set at 30- or 45-days, the average amount of time before payments are issued is actually 57 to 63 days, according to SageWorks. For lenders outside of the industry, those late payments by general contractors and property owners mean frequently dealing with expensive late fees. The resulting hit on the company’s credit score further disqualifies them from future low-interest loans.

Alternative lenders specific to the commercial construction industry have stepped in to solve this problem, allowing companies to take on more risk and grow to meet the increased demand for their services.

Mobilization Funding is one of those alternative lenders. Mobilization Funding began with the interests of a commercial contractor in mind. That means no late fees, and flexible payment terms set around your work schedule, allowing you to better cover the cost of bond premiums, labor and materials up front.

Funding affects everyone on the job.

If you don’t have the financial ability to make payroll, cover the bond premium, secure needed equipment or pay vendors, your entire project can be put at risk. If one subcontractor on the job cannot afford to cover the necessary costs, they may cut corners, like delaying material orders or putting less labor on the job. Even worse, if a subcontractor fails to pay its vendors or is otherwise unable to complete the job, the general contractor and owner risk a lien being placed on the property.

For many scopes of work, like Structural Steel, HVAC, Electrical, Concrete and Sitework contractors, the cost of material orders, equipment and dump fees early in the project can be incredibly expensive. So for those trades in particular, having sufficient financing in place is critical.

General contractors recognize that this financial strain by a subcontractor can delay or drag out the job, stressing the project overall. However, there are very few subcontractors who are able to have enough cash on hand to do the project without outside funding.

A Financial Capability Letter proves you’re financially prepared to do the work.

Include a Financial Capability Letter in your bid package, showing you have the capital available to do the project right.

The letter, supplied by your funding partner, will state the following:

The amount of funding available
That the funding will be set aside specifically for that project
The name of the project
The name of the general contractor

Often in the form of a loan pre-approval letter, the Financial Capability Letter will state that your company’s financial standing has been verified. The letter also acts as an additional point of reference, making the general contractor or project manager feel more confident in your ability to complete the work on that particular project. In a competitive bidding process, this can make all the difference.

Pro tip! In the pre-approval process, secure a breakdown of how much the loan will cost, then build the cost of that capital into the bid.

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