Construction projects are capital-intensive and, unlike many other industries, the company undertaking the work — that is, the subcontractor — puts in a considerable amount of work before billing and months before receiving payment for its services. Many commercial contractors have a hard time securing traditional funding. Alternatives are available, but how do you decide which is the best for your business? When seeking a construction loan, you should consider the following factors in deciding which loan to pursue:
What is the capital for?
Commercial construction loans are often used to cover any number of a business’s needs, such as the cost of leasing equipment, payroll, materials or bond premiums. The more specific, the better.
How much money is needed?
Prior to seeking a loan, examining your current financial position will give your business a better long-term picture of your true lending needs. For larger loans, the input of a Certified Public Accountant can help to ensure that you are seeking the appropriate sized loan for your company.
Once you have pinned down the purpose and amount of capital you are looking for, you can move on to identifying the appropriate loan.
Here are some additional questions to consider while making your decision:
Is your repayment schedule in-line with your pay apps?
Be sure to have a full written breakdown and understanding of when your payments are due and what the penalties are for late payments in case of a change order, weather delay or other holdups. Hidden fees and penalties can add up quickly and result in a more expensive loan than you had anticipated. Some funding options, like Merchant Cash Advances, auto-debit hundreds of dollars from the borrower’s account every single day. If you will only be on a project for another three months and you have a six-month payback period on an MCA, then you need to know you have more work starting quickly and enough work to be able to actually afford the same daily payment in months four through six of the repayment period.
Surprised? That’s just the beginning.
Check out our Guide to Merchant Cash Advance Loans.
Can you build the cost of financing into the bid amount or project costing?
The key here is anticipating which jobs you will need additional capital for rather than waiting until your coffers have started to run dry. Building the cost of financing into your bid amounts will allow you to keep your profit margin at your projected amount.
What is the total cost of the loan? (Including closing costs, interest and additional fees)
No loan is going to be free, but you should have a solid understanding of the cost of that capital before signing on the dotted line.
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The government construction contract realm is worth about $270-billion dollars, with a near-guarantee of payment for your work. From public schools to county courthouses, to airports and interstates, government construction contracts can be incredibly lucrative for commercial contractors.
But breaking into the public sector can be tough. Here are some tips to help strengthen your bid.
Start with the paperwork.
There is a lot of red-tape involved in bidding on a public sector project. This first step can trip up a lot of contractors. Get in front of the required paperwork by creating a list and tackling one item at a time. The government has set out steps for the documents and certifications needed to apply for public projects. They include:
Identify your NAICS Code, which will put your company into a particular industry classification.
Determine the size of your company using the SBA website’s size standard tool. A quarter of all government contracts must be awarded to small businesses, so if you qualify as one, that can give you an edge.
Register with Dun & Bradstreet to obtain a DUNS number, which allows you to submit bids for public contracts in your area.
Sign up with the Central Contractor Registration (SAM) database, in order to register and track those government jobs.
Join FedBizOpps.com, which delivers new relevant RFPs and contracts available for bid.
Look for subcontracting opportunities on government projects using the SBA’s SubNet database.
Connect with a Procurement Technical Assistance Center (APTAC) where you can sign up for classes, work with a counselor and attend networking events.
If your business is women – or minority-owned, be sure to register with the National Association of Women Business Owners or the National Minority Supplier Development Council.
Show your government experience online.
Make sure you are well-represented online and that your website is current, with language specifically geared to government agencies. This is key since, beyond the information you submit, decision-makers will frequently vet a company by looking at their online presence.
If your company has worked on other public projects, be sure those are visible on your site and link to a case study with details that back up your bid if possible. If you don’t have any public projects to showcase, look for projects similar to the one you are bidding on.
Place your government and public projects in your online portfolio. Include great photos and descriptions of the work performed. Make sure your gallery is easy to find and navigate. Consider grouping or tagging your government projects by categories like schools, municipalities, and emergency response stations.
Keep an eye on your competition.
Keep your finger on the competition’s pulse by tracking contractors, contracts and future projects online. A little bit of research can give you a better idea of what your competitors are doing and help you gain an edge in positioning your company. The U.S. General Services Administration has recently merged several sites into one easy-to-use interface: https://beta.sam.gov/. This site houses information on governmental design and construction, policies and compliance, environmental laws and regulations, and more.
Focus on your reputation and past performance.
Proving that you are an established business and financially stable is essential to securing a bid. Make sure you are cashflow positive and that your financials are in order. An outside consultant or a CPA can be invaluable if you are unsure of your standing. Ultimately, the company that offers the most competitive bid with a strong track record of finishing high-quality jobs on time will secure the bid.
Click here to learn how a Financial Capability Letter can strengthen your government contracting bid.
Triple-check your bid amounts.
It can be tempting to lower your bid amount in order to beat out your competition and win the job. Remember that public entities will scrutinize your bid, and most will weed-out those that are unrealistically low.
Even if you were to get the job at unrealistically low price by dropping your profit margin you are adding unnecessary risk to the job, especially when a weather delay or unforeseen setback occurs, preventing you from being able to do the job as originally planned. It’s better to wait until the right bid goes through at a price that is appropriate to the job.
Bidding is all about the numbers. Make sure yours are accurate.
Get a free Margin versus Markup guide here.
Be sure to have adequate funding in place.
One of the most challenging parts of securing a bid is proving that you have the money to do it right. Lacking the cash and mobilization capital to cover expenses like permitting, surety bond premiums, material, and labor can be a big hit to your company’s bottom line before the project has even started.
Over the last several years, many commercial contractors have scraped by with whatever cash they have until they submit their first pay app. Then, they seek out other ways to finance the project, some of which often result in an impossible cycle of debt.
Click here to read The Guide to Merchant Cash Advance Loans.
You can avoid that debt whirlpool by securing funding upfront to cover early expenses. Securing funding before the project starts strategy allows contractors to build the cost of the capital into their bid rather than have it come out of their profit margin later on. Companies that secure a loan in advance can bolster their bid by providing the property owner with a pre-approval letter.
Be realistic and meet expectations.
Being awarded and then failing to perform on the first project because you took on a one that was too large or too challenging will make it unlikely for you to secure another public bid in the future. The construction industry relies on word-of-mouth and reputation, even in the public sector. Don’t burn your first opportunity by shooting for the moon and falling flat.
Plan for your first public project to be well within your business’s comfort level and capability. Be accurate and upfront with your bid, get the work done, and meet expectations at every step. The reward will be the larger project you win the next time, and the next.
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Are you still walking around a job site with a clipboard and several coffee-stained checklists? Or dealing with fax machines and frantically rushing to the office to print out documents? Good news! The answer to increasing your productivity is right in your pocket.
If you have a smartphone or are willing to invest in one, you can transform your business operations from an organizational nightmare to a well-oiled machine. Developers have created a seemingly endless number of apps and programs designed to make you more productive.
Here are four types of apps and programs we recommend that can help shore up your workflows:
Apps for Equipment Rentals and Tools
Many large companies in the last several years have released their own apps to make it easier for you to use their products or services. United Rentals has a free UR Jobsite app that allows its customers to access their account information and remove or extend their rental terms, or even shop for used equipment they are selling.
Tool manufacturer Dewalt has a handful of apps, including one that will track the tool battery life and another that can handle job site calculations, from stairs landing height to volume conversions.
Even retailers have apps to simplify new tools and equipment purchases. Most national retailers, like Lee’s Tools, Home Depot and Lowes all allow in-app purchasing.
Apps for Document Signing
There are tons of apps for Apple or Android devices that allow you to sign work forms and other documents on the go. Some of the most popular include Doc U Sign, Adobe Fill & Sign and Sign Easy.
Financial and Accounting Apps
Even many smaller credit unions now have apps that allow you to keep tabs on your current accounts. This can help you track whether or not a wire transfer went through, if one of your vendor processed a big check, or if there is any unusual activity on your account.
Does your payroll or accounting company have an app? Many do, and they can make your life much easier. Paychex, for example, has a handful of different mobile platform options, including one allowing employees to punch in and out for the day on an iPad or tablet on the job site.
Intuit also has a payroll on-the-go option that even has a free direct-deposit feature; business owners can review and edit all the payroll information from their phone or tablet and then authorize the direct deposits.
Any contractor knows that keeping on top of invoices is key in keeping the business running smoothly. There are several app options for this, like Invoice2Go or Invoice by Wave, that can help to draft, track and archive invoices to make it easier to manage cash flow.
There are even some smaller apps, like MileWiz. This automatic driving log removes the worry and work of actively recording mileage on your vehicles for tax purposes or driver reimbursements.
It has been about a decade since the first iPhone was released and now over 200 million Americans have smartphones. There are tens of thousands of apps that allow people to do all sorts of things, from accounting to taking current pictures and videos on the job site. Chances are, your competitors have them and are using them to improve efficiency in their own company. Are you?
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Construction can be a dangerous career. Thousands of people are injured every year, a result of many factors like careless drivers, poor training, or inadequate safety policies. But the industry is working hard to correct many of these problems with new technology and best practices when it comes to safety.
Here is a list of new technology and advancements that may help to minimize the risk of accidents on your job site.
Smart Construction Technology
Sensors are already saturating themselves into our everyday lives. Car manufacturers install them in vehicles to prevent accidental collisions. Many smartphones automatically track your steps per day. Sensor technology is already well-integrated into many types of construction equipment, but there is still a long way to go. Several companies are working on implementing new personal technology to bring safety equipment into the 21st century.
For example, DAQRI has developed a hard hat integrated with Google Glass technology so that the wearer can see the temperature of a pipe or piece of equipment without having to touch it. That can help prevent burns as well as being able to spot problems like hot spots at a construction site. The helmet also tracks where a worker is located on the job site to alert them of hazards in certain areas, or give instructions for the proper handling of a different pieces of equipment to prevent misuse and subsequent injuries.
Smart Safety Vests monitor a worker’s heart rate and body temperature and warns them of any abnormalities. This is especially helpful during the summer months for construction workers to prevent heat stroke or other health issues caused by the heat.
Triax Technologies, Inc. has made wearable sensors attached to a worker’s belt that immediately alert others when the wearer falls or is otherwise injured. The sensors also help to log information about the incident for insurance purposes.
Low Tech Changes
On the other side of the spectrum there are many recent, less technical improvements that have improved the safety of construction zones.
- – New fabrics have led to dry, cooling bandanas and neck wraps that can help prevent workers from overheating.
- – Safety gloves are now stitched with steel to prevents cuts, punctures and abrasions while allowing for enough movement to get the job done.
- – Work boots today are specifically engineered to protect the wearer from much more than toe and ankle injuries. Some are built to combat slipping on water or oil, prevent puncture wounds from stepping on a nail, and protect against freezing temperatures or even electrical charges and acid spills.
Construction continues to be one of the more hazardous industries to work in, but these practical solutions and more like them are appearing every day to make hard-working employees safer.
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Continuing education is often a requirement for unions or to retain a state contractor’s license. Rather than sitting through the boring tutorial you always drag yourself to, why not mix it up a little and get more value out of your time and money?
At Mobilization Funding, we’re always looking for ways to help our clients improve cash flow and grow their businesses. Here are four online subcontractor courses we found to help you do just that.
Business Reality Check: Pitfalls on the Path to Prosperity
This interactive course helps business owners in all industries consider shortfalls in their operations through instructive, real-world examples. The class runs the gamut—a walk-through of founder successes and failures, management team growth strategies, and insight into dealing with cash flow cycles. While not specific to the construction industry, this course provides valuable lessons in company management and can help you identify ways you can improve and allow for more growth.
2 hours; $29.90
A Better Construction Contract
A flawed contract can cost you thousands of dollars in extra work or change order and even lawsuits. Do yourself a favor and dive into this 2-hour course that will help to ensure you are going to have a successful project and walk away with the profit you deserve. Highly rated by nearly 3,000 people, this class walks through the differences between Guaranteed Maximum Price (GMP) and Stimulated Sum contracts. The instructor goes through not only the relationships between contractors and property owners, but the dynamic that those parties have with the architect or designer.
2 hours; $29.90
Pricing as a Professional
Break out your calculators! This hands-on intermediate class is all about how to accurately estimate job costs so you can confidently turn a healthy profit on your next job. The class goes beyond adding the cost of labor, materials and equipment. It considers more subjective aspects like how to factor in overhead and how to adjust your pricing models to different types of customers beyond your typical accounting methods. But don’t worry, the course is presented in a common-sense fashion and features practical instruction and methods.
2 hours; $79.90
BIM Use and Risk Management
BIM, short for Building Information Model, is a technology used by more than 70 percent of building owners, engineers, architects and contractors to better manage and plan out construction projects. “To not adopt BIM and all its capabilities is like continuing to use a flip phone instead of a smartphone,” one property owner told researchers at McGraw-Hill Construction. There is even some discussion over whether insurance providers will eventually give reduced premiums for those that use the technology.
This course digs into the technology and talks about its implications for the construction industry. For those always looking to stay ahead of the curve, this is a great course to pursue.
2 hours; $79.90
Continuing education is an important tool for your business, whether you are learning for fun or to fulfill a professional requirement. These courses will maximize your time and money by helping you run your business more efficiently, manage cash flow more effectively and open up more opportunities for growth.
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Why would a subcontractor need a construction loan? Managing cash flow and staying above water can be difficult for any business, but the problem is especially prominent in the construction industry. Due to a complex and inefficient payment system, contractors have a nearly impossible task of covering the cost of a job, especially before the pre-construction phase begins and for the first three months after you mobilize and begin working on a particular site.
That system forces you to have upwards of 20% or more of the total project cost up front to cover things like bond and insurance premiums, materials, payroll, equipment and supplies. You won’t be paid for 60 or 90 days after a project begins—and that’s if everything goes just right.
Construction Loan Alternatives
For a smaller job, you may be able to scrape together funding from a bank on a personal line of credit or secure a loan, but that loan is based on your personal assets. It’s risky and there’s only so far that a business owner can go with that strategy.
Banks continue to be reluctant to offer small business loans to contractors after the economic collapse of the late 2000s. Yet, according to the Federal Reserve Bank of New York’s annual small business credit survey, 61% of employer small business’ faced financial challenges in 2016. The number one problem was securing the funds they needed to expand.
Another 17% of respondents said they couldn’t get the money to pay for inventory or buy what they needed to fulfill contracts.
Without taking on a partner and giving up some of the ownership of their company, there are few good options for smaller and mid-sized subcontractors who are interested in bidding on larger projects and elevating themselves to the next tier.
Factoring
It’s common for contractors to limp along with the cash they have on hand and then bill the general contractor for the work completed in the first 30- or 60-day time period of the project.
Then, with cash reserves largely dried up, you start to feel the pressure. You may start to cut employee hours or hold off on ordering supplies. To stay afloat, you may turn to a factoring company.
Factoring companies purchase submitted and approved invoices and pay you, the subcontractor ,a percentage of the funds owed (typically about 80%). The general contractor then pays the factoring company the full invoice amount, which recoups their initial payment to the contractor as well as a fee for their service. Any remaining profit is then sent to you.
Benefits and Drawbacks of Factoring
Used correctly, factoring can be a useful tool for a subcontractor. But there are disadvantages, too. It’s a headache for general contractors, who find themselves inundated with paperwork. It’s stressful for the subcontractor too, as it may be viewed by the general contractor as a sign that you’re having financial troubles.
Merchant cash advance loans
What if you find yourself in such financial distress that you need payroll or equipment capital before you send the first invoice to your general contractor? This situation often results in a daily debit loan, which is when a company grants you a lump sum dependent on cash deposits in your company’s bank account and then the lender automatically deducts money from the company’s checking account on a daily or weekly basis until the loan is repaid in full.
The Slippery Slope of Cash Advance Loans
While daily debit loans and other cash advance loans have some benefits—they solve the immediate funds issue, have automatic repayment and can help boost business credit scores—they’re also difficult to sustain.
Cash advance loans are expensive and cannot be paid off early. And once the repayment schedule starts, the lender automatically deducts hundreds or even thousands of dollars from your account, making it more difficult to determine how much cash you really have on hand. You may be left feeling like you’ve solved one problem only to find you’ve caused a new one.
Learn more about the dangers of MCAs in the construction industry.
The problem with lump sum payments
Many contractors act under the mindset that if they could just get that extra $100,000 they need, everything else would work out. But that is often not the case.
A Cycle of Debt
Think about it from a personal finance perspective. If you as a business owner see that one of your employees immediately directs their paycheck to a payday lender, you can guess that employee is in a challenging financial situation. You hope it’s short term, but if you see the same behavior week after week, month after month, you know your employee is losing hundreds of dollars to fees and interest and is stuck in a spiral they can’t easily escape from.
By continuously turning to a factoring or daily debit company, your business is in the same boat as that employee. And like him, the situation is stunting your financial growth by spending money on interest rather than setting it aside for your next big project.
Backward Allocations
Properly allocating the lump sum once it comes in is often the worst part for subcontractors. If the money is spent working backward and paying for work that was already done, you’ll find yourself short again and likely need another loan to make it through to the next pay out. And the next. And the next. Each loan means more profit flying out of your pocket and into the lender’s.
And if the unexpected happens, like a weather delay or a change order, there is even potential for you to lose money on a particular project. Those cases put tremendous stress on the entire business model and put your future projects at risk.
Learn more about commercial construction financing.
Cash in on opportunity
In a perfect world, a subcontractor would grow slowly, setting aside money for each new job you pick up in order to fuel any upcoming projects. You’d have a great track record with estimating project costs low enough to keep you competitive, but have the bid high enough that you can turn a healthy profit and manage any setbacks that will arise.
The good news: Now is a great time for contractor growth.
The U.S. economy is booming and the construction industry is seeing explosive growth. Dozens of airports around the country are under major construction, or are ramping up to start their renovations. Developers and Fortune 500 companies need contractors now more than ever to build their massive technology centers, enormous housing developments and sprawling office parks. Opportunity is everywhere.
Now is the perfect time to grow your business, whether that growth is $100,000 to $500,000 or $3 million to $10 million. The trick is in doing your research to make sure you are financially prepared to make that leap.
A Cash Flow Partner
One of the best ways to move your business forward is to partner with a company that is committed to your mission and is knowledgeable about your industry. You need a company that is able to offer you the funds you need when you need them and sets a repayment plan in line with the cash flow cycles of your business. Having such a partnership allows you to focus on doing the high-quality work you were hired to do and minimize the stress of cash flow management along the way.
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