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.
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.
SBA Loan
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.
Invoice Factoring
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.
Mobilization Funding
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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Is there such a thing as “good debt?” Yes, there is. What is the difference between good debt and bad debt? Good debt helps you grow. Bad debt weighs you down.
For example, meet Kelly, owner of Kelly’s Creations.
Kelly has owned and operated the small manufacturing company for 10 years, ever since her dad retired. Kelly is very proud of her fiscal responsibility. In her early twenties, she had a small mountain of credit card debt, which she has paid off. Now, she pays for EVERYTHING in cash, both in business and in her personal life.
One day a customer comes to Kelly with an order too big to fill with her traditional materials budget. It’s a huge opportunity for her company, but she’ll need a funding source. Kelly thinks she’s a shoo-in for a small business loan. She’s never missed a payment to any of her vendors and she has a solid chunk of reserve cash in her bank account.
But what Kelly doesn’t have is credit history. Since she’s never borrowed before, there is no way for the bank to ensure she’ll be responsible with the debt. She is denied the loan.
Debt is not inherently bad.
As Kelly learned, debt is not inherently bad. We know this is true on some level, because most of us take out a mortgage when we buy a home. We may even take out a loan to buy a new car. We accept these forms of debt as necessities. But when it comes to business, many leaders try to avoid debt like the plague.
It is not the plague, though. Debt can be an important part of your business strategy, if you use it wisely.
Types of debt, good and bad.
There are commonly held beliefs on what constitutes “good debt” versus “bad debt.” Examples of good debt are:
- Mortgage
- Lines of credit
- Small business loans
- Automobile loans
- Student loans
These are loans that either pay for an essential in your life, like a house or vehicle, or represent an investment that will pay you a return. Bad debt, on the other hand, has no chance of generating long-term income and/or pays for something that quickly loses its initial value. Bad debt examples typically include:
- Credit cards
- Payday loans or cash advances
- Automobile loans
Did you notice something odd? Automobile loans is on both lists. That is an important point — automobile loans allow you to purchase an essential life item, but the loan itself does not generate income and the item in question quickly loses its value. (Unless you are buying a classic, like the 1969 Dodge Charger, in which case … drive safely!)
Which brings us to the point: It’s not the debt that is bad or good. It’s how you use it.
Good debt is all in how you use it.
It may be convenient to classify one type of debt as “good” and another as “bad,” but these labels do business owners like you a disservice. They strip you of the power to decide how debt will impact your business.
For example, credit cards are commonly thought of as bad debt. But, if you are a small business using a credit card to purchase supplies and you pay the card off every month, this is actually good debt! You are using the money to leverage your buying power and capacity to grow your business (generating long-term income) and you are building a solid credit history.
Let’s talk about another suspect on the lists above: student loans. Investing in your education is great, except expected median salaries haven’t kept up with the cost of a degree. For example, if you borrow $80,000 to get your bachelor’s but only earn a $70,000 salary afterward, you’ll feel the pinch of those payments when they get added onto the rest of your household debt. The situation is even worse for students who take out loans and do not receive a degree.
Even merchant cash advances, which we talk about at length and warn manufacturing and construction subcontractors away from, are not inherently bad debt. Are they risky? You bet. Do we caution business owners in industries like manufacturing and construction away from them? All day every day. But, plenty of business owners use MCAs effectively. They understand the payment structure and know their cash flow can support it.
See how it gets complicated? The real question is not in whether a source of funds is good or bad, but whether you will use the money in a way that allows the investment to pay for itself through business growth and revenue generation.
The ability to borrow in order to capitalize on big opportunities, like Kelly and her customer’s big order, can be the difference between growth, stagnation, or decline for your company. And here’s a tip: Stagnation is decline you haven’t noticed yet.
So now you know that debt is neutral until you use it. The next question is, how much debt should your company have?
How much debt is too much debt?
Now we come to the crux of the matter: balancing opportunity with debt. How much debt is too much debt? There is no hard and fast answer; it depends on your business’ growth plans, the type of debt and cash flow. You can and should keep an eye on your company’s overall debt, especially as it compares to your total income.
This is something your CPA should be reporting on each month — you do have a CPA, right? If not, read this next: 4 Signs You Need to Hire an Accountant for Your Commercial Construction Business.
The fate of your debt lies in your hands.
Are you worried about Kelly? Don’t be. She found the funding she needs, and has since opened up lines of credit with a few of her suppliers and hired a CPA to help her develop financial strategies that will grow her business. She still pays for most items in cash — old habits die hard.
YOU can learn from Kelly’s mistakes. Debt is not an evil boogeyman lurking in the shadows waiting to destroy your business. Debt, when used correctly, can open doors to new opportunities for your business, help you achieve your goals, and give you the foundation you need to GROW.
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Revenue is the lifeblood of your business. Profit supports your goals for growth, but many construction contractors operate on the thinnest of profit margins. Here are eight strategies you can start using today to increase the profit margin on individual jobs, and your company’s overall profit margin.
#1 Know your job numbers.
They say every river leads to the ocean. The same philosophy is true for your profit. The profit of every job adds up to your company’s overall profit. Increasing your profit margin a few percentage points on each job can add up to a significant increase in net profit and free cash flow for your business.
How do you increase your profit margin? It starts with your bid. Accurately estimating profit margin from the beginning can tell you which jobs to pursue, and which aren’t worth the sweat. That means you need accurate bidding, which all comes down to numbers. It feels great to get a job every time, but doing work that is not profitable just to have work will RUIN your business and is one of the leading causes of why construction businesses fail.
Don’t do work if you aren’t going to make money.
Make sure your bid includes ALL job costs, including overhead and cost of capital. It is imperative you add the cost of your general overhead to every job you bid. In order to do that you have to KNOW what your total overhead costs actually are. Overhead, in its most general sense, is the total of all the costs to run your business that are not directly linked to a specific job. That includes all employees that do not work on the job, your rent or mortgage, insurance costs, payroll fees, entertainment, any other debt payments, etc.
The total of all those costs on an annual basis needs to be calculated – that number is your total overhead cost.
The total overhead cost divided by your total revenue is the percent you need to add to all of your bids in order to properly account for overhead in your future estimates.
In order to figure this out add up all the costs from your 2019 income statement that are not related to actual jobs. Then divide that by your total revenue in 2019. Here is an example for you:
- Annual Revenue: $3,000,000
- Annual Expenses:
- Office staff Salaries – $100,000
- Rent – $30,000
- Insurances (GL, workers comp, auto, etc) – $80,000
- Debt Payments – $40,000
- Total: $250,000
- Total Expenses ($250,000) divided by Total Revenue ($3,000,000) = 8.3%
8.3% is your Overhead allocation. This is what you need to add to every estimate just to break even on the job.
If you bid $100,000 on a job and you have $80,000 in labor and materials on the job you make think you are making $20,000 or 20% margin. The reality of that is you are only making $11,700 on that job because there is $8,300 of overhead expense that needs to be paid also.
Dig into historical data to determine if the costs you have estimated in bidding were accurate at the end of the project. If not, it’s time to update your estimate numbers.
Your profit margin needs to be higher than retainage. Waiting to pull a profit from retainage will put you at a huge risk of a cash flow shortage until the job is completed and your retainage is paid out, which can take a long time to be released.
#2 Know your company numbers.
Now that you are keeping track of your overhead, job costs, and profit margin on each individual job, expand that thinking out to your company as a whole. Remember to include all the costs we discussed in #1 like insurance, your fleet, and office supplies. Do you have outstanding debt with interest that is nibbling away at your profitability? You need to know which debt to attack first, and how the entire ecosystem is working for or against your profit.
This macro view of your company’s profitability can be a real eye-opener, but it’s critical to your success. Profit margin is one of the biggest reasons new construction companies fail.
Pro Tip: Hire an accountant. A CPA can help you determine these numbers accurately, identify cost-saving efficiencies, and help you forecast numbers for the future.
#3 Reduce your cost of customer acquisition.
Lead generation is always a hot topic with contractors. The cost of that lead generation, and its outcomes, are two critical pieces of data that impact your profit margin. How many leads is your sales team producing? How many leads have you purchased? And, most important, how many of those leads converted into new business? If you have 100 new leads and 0 new clients, we’re sorry to tell you that you have wasted your money. At the same time, if you have a rock star sales representative who closes a new deal every day, that person is worth their weight in gold.
Track which lead generation channels are delivering the most leads, and the BEST leads. Cut what isn’t working. Spend your marketing dollars where you are seeing the best production to increase your profit margin.
#4 Borrow to GROW.
Borrowing to survive is bad, but borrowing to capitalize on an opportunity for growth is SMART! If you can borrow $500,000 in order to execute a job with a 20% profit margin and you earn $125,000 in profit, then the cost of the financing is worth it.
Every funding option has positives and negatives, and borrowing without a plan is almost always a bad idea. It’s important to view every lending opportunity with this question in mind: Can I borrow this money to grow and make sure I don’t undercut my growth during the payback?
Read more about borrowing to grow:
#5 Stop competing on price.
You are not a commodity. Neither is your business. A strategic price reduction under the right circumstances is one thing, but when you compete on price alone to win business, the message you are sending is that your work is only worth that much. That’s not a great recipe for long-term growth.
Instead, focus on your reputation as a leader, your company’s reputation in the industry, and the quality work your team is executing. Performance and accountability build a great reputation that will last longer and open more doors than a cheap bid.
Go back and read that last sentence again.
This comes back to bidding. Show your numbers and be upfront about how you came to them. You know what it will realistically take to get the job done right, and a good GC does too. Make their lives a little easier with bids that are clear and comprehensive, that answer their questions, erase pain points, and put their minds at ease. Showing them how you are going to fund the job will also help to put them at ease and trust that you can perform the work they contracted you for. That’s a long-term growth strategy that will show up in your profit.
#6 Trim the talent fat.
Take a deep breath, this one is hard.
You need to balance permanent staff and contract workers. Even harder, you need to take a look inside the office. Is your payroll bloated with specialized staff members who do only that one job or don’t do their job well enough? Would you be more profitable if you combined roles or outsourced a few of these duties? If you have people on your payroll that you have to pay whether there is work or not, you need to make sure they are (1) necessary, and (2) helping the business grow. Get lean and efficient to increase profit margins.
Nobody likes to let good people go. It is not a reflection of them or you — it is business. Be the boss they’ll never forget by helping them find their next opportunity. Leverage your network.
#7 Search for efficiencies and lean into them.
You might be surprised where you can find efficiencies that increase productivity and profit margin. Updating your project management software will have a cost, but if it means you can schedule more work faster, it will soon pay for itself. The same goes with basic fleet maintenance. It may be cheaper to repair that old equipment right now, but in the long run how much are you spending on repairs? At some point, it becomes a better investment to retire old members of the fleet and replace them with newer vehicles.
Efficient and effective communication between your field crew and office staff can help you get paid faster. When you get paid faster, you can pay your vendors, suppliers, and lenders faster. All of which means fewer interest payments and an increase in profit margin.
#8 Set goals and track your progress.
To increase the profit margin for your company, assign a goal to each of these tips. Can you increase your average job margin one percentage point this quarter? Can you reduce your cost of customer acquisition from $350 to $100? Set the goals and then track your progress toward them. Monitor the data after every job, at the end of every month, and at the end of the quarter. You do not have to do all of these things at one time – pick one or two and see them through to the end and then pick 2 more until you implement all of them.
Increasing your profit margin gives your company a solid foundation from which to grow. It makes you more attractive to lenders, increasing the odds you will get the funding you need when you need it next. It also gives you more peace of mind and less stress, so you can focus on doing the great work that your business is known for.
Now go out there and get paid.
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Do you stress over payroll? Construction subcontractors face an uphill battle every week to get payroll checks written and delivered. First there is the construction industry’s slow payment problem; it is hard to pay your team when you have not been paid for the work they have been doing. But many business owners compound the problem by not having a dedicated payroll checking account.
Ensure payroll funds are in.
When you only have one operating checking account, all requests for funds are equal. It is basically a “first-come first-serve” scenario, putting your payroll at risk. A dedicated payroll checking account eliminates the concern that another business expense — like materials, equipment rentals, or debt payments — will cause a potential overdraft when payday comes.
Safeguard your account data.
If you process payroll from your main operating account, the entire account number will print on the check. A separate payroll checking account allows you to mask the main checking account number, protecting it from potential fraud or misuse.
Level up your financial health.
A single business checking account can also be a headache for your bookkeeper and accountant. There are a lot of withdrawals made from this account, and your bookkeeper needs to account for all of them. Streamline payroll expenses by having them all come from one dedicated checking account. When your accountant reconciles your operating account, it is easy to link transactions to your payroll account on the ledger. This also ensures that employee checks will always clear, whether someone holds it too long or cashes it right away!
We always recommend using a third-party payroll company payroll for your business – that way payroll taxes are calculated correctly with all other deductions that are needed and, whenever possible, payroll can be directly deposited into each employee’s bank account.
If you or someone on your team is doing all of this work, consider hiring a professional accountant and a payroll processing service. A key practice in accounting is to separate the duties of AP reconciling and payroll processing. It creates a check-and-balance system, reducing the potential for error or theft.
One more thing on business operating accounts: It is bad practice to have an ATM or debit card linked to the main operating account. If you need to have a debit card versus using a credit card, then open an additional checking account that you can transfer money into from the operating account first and then debit from there. This keeps personal expenses, or even smaller charges that could appear to be non-business related, out of your main operating account. This also protects your main account from fraud or theft or anything else that could be bad related to debit cards.
Make your company more attractive to lenders.
Separate accounts also make quarterly payroll taxes easier. Financial and tax reporting are important components of your bankability — how attractive your company is to a bank or lender. Having a separate payroll checking account shows your company’s maturity and responsibility, which helps the lender determine whether you will be a good candidate for a loan.
Some lenders, Mobilization Funding included, require a separate checking account in order to process funds. An isolated account ensures the funding is used only for its intended purpose.
Would you like to learn more about our lending platform? Click here to see how our loan process works.
A payroll checking account is good for your growth strategy.
A dedicated payroll account allows you to plan for payroll better, manage your company’s financials, and become more attractive to lenders so you can get the capital you need to GROW. It also sends a positive message to your team: Your paychecks are our priority. You work hard for us, and we work hard to protect your paycheck.
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Your bid is a powerful tool. It’s like Thor’s hammer, knocking down the competition and winning you victory! But only if you know how to wield it. Submitting an ineffective bid, even one that wins you the job, is like swinging that hammer right at your own kneecaps. You’re probably going to go down, and it is probably going to hurt. We put together these bidding tips to keep you swinging superhero bids that protect your profit margins and grow your business!
We’ll start with a review of the tips we shared in 3 Bidding Mistakes that are Killing Your Profit Margin.
Know the retainage before you bid
You need to be as close to cash flow positive (more money coming in than costs going out) as possible with every pay app, but that’s tricky in the first month of the project or if you don’t know the retainage a GC plans to hold on the job. Don’t leave it up to chance, and please don’t tell yourself you’ll float on profit from other jobs while waiting on retainage. Counting on that is too risky and you can’t float, and your business can’t survive without a steady, positive cash flow.
Bidding Tip: Work with the GC to settle on retainage. It may be negotiable, or you may have to raise your bid. Perhaps the percentage of retainage is not negotiable to start but you can negotiate a smaller percentage once you reach a certain project milestone. Be honest — you are protecting your business AND your team’s ability to do the job.
Calculate your costs and include them all
This may seem like less of a bidding tip than a no-brainer, but many subcontractors miss an important detail when planning their project costs — overhead and the cost of borrowed money or debt payments.
From overhead to labor to equipment and fuel, your bid includes an accurate estimate of all the related project costs. But, does it account for how you are going to PAY for your employees that are not part of the project labor force, or your other general overhead like rent, office staff, your salary, insurance, debt payments, vehicle payments or other equipment costs?
And does it account for the debt payments or the money you borrowed to start or fund the project?
It better, or the cost of that funding will come straight out of your profit or worse; be more than the profit you estimated to realize in the first place. Lastly, to be most effective and safe, you should account for all of the cost and overhead net of retainage – meaning don’t even count on the retainage as part of the contract for cash flow purposes – you are not going to get it until the entire project is over in most cases and that cash will not help you while you are performing the project anyways.
Bidding Tip: Work with a trusted finance partner from the start to prepare a term sheet. Include the cost of your funding in your overhead or project costs.
Your funding plan should also be part of a conversation with the GC. Start by acknowledging the reality: Slow payments are part of the deal in our industry. Not a fan of that idea? Check out our blog, Why Subcontractors Need to Talk About Slow Payments with General Contractors to set yourself up for success.
Bid to grow, not just to win
A subcontractor submitting a low bid to land a dream project or new GC relationship is like a farmer counting spring chicks before the eggs are even laid. For starters, you cannot guarantee that this project is the one that is going to unlock a treasure chest of larger, more profitable deals. Second, it will be hard to justify your much larger future bid given your first. Third, final, and MOST important, if you underbid and something goes wrong this dream job will quickly turn into a nightmare.
You should estimate and bid the budget needed to do great work and perform. Performance will make you stand out to a GC. If you want a general contractor to give you a chance to work on their project, talk to them about your ability to perform and maintain a project schedule, not price!
Bidding Tip: Remember that this bid is YOUR superpower to grow. Put in the details, show your work, prove what it will take to do the job right AND that you are the right company to do it. Making promises in bidding that you keep in execution is more likely to build your reputation with the GC than undercutting yourself and scrambling to do damage control later.
We mentioned “show your work” above – this is important. Why? Because the level of detail that you show will be very telling to the GC and can separate you from the others bidding the job. The details can show the GC that you know what you are doing, that you have been thorough, and that if they hire you that same level of detail will go into their project!
Consider the Project Method
Design-Bid-Build (DBB), Design-Build (DB), or Construction Manager At Risk (CMAR) or Integrated Project Delivery, each project method has its own risks and variables for the General Contractor. If the project is CMAR, ask the General Contractor about the Guaranteed Maximum Price and expectations regarding Contingency Amounts, Allowances, and Change Orders.
Consider the Procurement Method
Not all jobs are automatically awarded to the lowest bidder, though it may seem that way sometimes. Owners like Lowest Bid Procurement for obvious reasons, and a lot of government contracts require it, but it still isn’t the case on EVERY project. In Two-Step Bidding, your technical prowess is just as important (if not more) as your price, because it is your technical qualifications that are reviewed first. In Best Value Source Selection, the entire scope of your company — qualifications, management, staff, reputation, and price — are all under review.
Bidding Tip: If you’re looking to grow your company with a sustainable cash flow and project pipeline, don’t undercut your strategy with low-ball bids when you don’t have to. Invest in building a team of superhero laborers — training on-site and off, regular certification renewals, management training for you and the rest of your executive team. Be confident on the merits of your team and bid appropriately.
Bid on the RIGHT jobs
It can be tempting, especially when you are trying to recover from debt or grow your business, to bid on every project that comes your way. Resist temptation! First, bid on jobs that you can successfully execute. Look for projects that will grow your network or raise your profile with your GC network. And again, most important, bid on projects that will allow you to make a profit.
An effective bid is a mighty weapon in the battle to win more work and GROW your business. Wield your power wisely. With these bidding tips, we know you will.
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Ready to put the power of a finance partner behind your bid? Answer 3 questions to start your application!
“You’re either growing or you’re dying” is a popular business idiom. For some companies to grow, they rely mainly on customer referrals and organic market growth. For everyone else, you either need to generate more leads, capitalize on bigger opportunities, or some mixture of both.
Here’s another business quote, “You have to spend money to make money.” In order to execute a lead generation strategy or say YES to the next big job, you will need extra capital. Borrowing capital makes a lot of business owners nervous, especially in cash-flow volatile industries like construction and manufacturing. We wrote this article to show you how to borrow money the smart way in order to grow your business.
Know WHY you are borrowing and for WHAT.
Do you need a short-term loan in order to take advantage of a supplier’s discount, or an influx of cash to move forward on a new location or launch a new service line? Knowing WHY you need the money — the goal behind WHAT the loan is expected to do for you — can help determine which funding option is right for you.
Are you borrowing capital to fund a marketing or advertising strategy? Make sure you have clear goals around the campaign. Ultimately, the new leads generated by your marketing should more than cover the cost of the loan. Marketing is a long-term investment, so your funding options should have longer payback schedules.
Are you ready to take on a larger project, but need funds to cover the first few months of work? Commercial construction subcontractors often need a cash flow boost when they mobilize on a new job. It’s just the nature of the industry. This kind of short-term need benefits from short-term funding options that can be paid back once you start getting paid for the job.
At the end of the day loans for existing businesses fall into two categories:
Loans for tangible investments, like property, vehicles, or equipment. This is used for items you need and can pay off using the existing cash flow of the business. In other words, your business should be able to handle the monthly payment of the loan.
Working Capital Loans allow your business to take on existing work and are needed when certain costs are incurred by the business that fall outside of when you are paid by your customers. If you need money to purchase materials or pay for labor associated to existing work you have not been able to invoice or be paid for yet, this would be the loan for you.
Only borrow what you need.
When lending partners tell you how much they could loan to you, it can be hard to walk that number back. Think of all the things you could do with all that money, right? Wrong. Borrowing more than you need is a great way to increase your company’s debt right when you’re trying to grow.
Figure out exactly how much you need to accomplish the goal you identified previously. Borrow that much and no more. Remember, if you need cash later it will be easier to get if you have successfully paid back your first loan.
Getting more money than you need and therefore using the wrong type of loan to pay for the wrong items will put your business in jeopardy if something goes wrong.
Research your funding options.
Every funding option has advantages and drawbacks. It’s important to do your research and choose the one that best works for your company and your business goal. A daily debit or Merchant Cash Advance (MCA) may seem like the perfect “quick cash fix” for your short-term growth goal, but they come with a host of challenges for commercial construction companies. Here is a “cheat sheet” of the common funding options to get you started.
Small Business Loans are one of the most traditional form of small business funding. Whether you secure your loan through a bank or a lending partner, most small business loans have competitive interest rates — fixed or variable — and a set repayment schedule. They require a strong credit score and collateral to back up the loan in order to qualify. Since the Great Recession, it has become significantly harder for companies in industries like construction and manufacturing to qualify for traditional loans like these. These loans will rely heavily on your personal credit.
SBA Loans are small business loans of which up to 80% of the principal of the loan is guaranteed by the Small Business Administration. This reduces the lender’s risk and opens new funding opportunities for small business owners. The requirements for an SBA loan are similar to a small business loan, with the addition of your business qualifying as a small business according to the SBA. These loans also will rely on your personal credit and have a minimum credit score requirement of 650.
Commercial Credit is a pre-approved amount issued by the bank or lending partner that your company can access at any time. Commercial credit is often used to cover unexpected costs or to take advantage of a sudden business opportunity.
Working Capital Loans cover a company’s routine operational expenses such as payroll, rent, or debt payments. This type of loan is good for companies that experience uneven or cyclical cash flow cycles. For example, many manufacturing companies need short-term funding during the fourth quarter, when their customers are focused on selling the goods already made. The manufacturing companies repay the debt in the spring and summer, when orders pick back up.
Invoice Factoring is commonly used in commercial construction and manufacturing. The factoring company works directly with your GC or customer to verify an invoice is accurate and owed to you, then you are advanced up to 80% of the invoice amount. When the factoring company receives payment for the invoice, it repays itself the amount advanced to you, plus a fee. Any remaining balance is sent to you. This is a good option when you have invoiced your customer already and are just waiting for your customers to pay you, but they are not paying fast enough. This is not good if you need cash before you are able to create the invoice.
Purchase Order Financing is like invoice factoring. The PO financing company will pay your supplier to fulfill the order. The customer pays the PO financing company directly. It deducts its fees and sends any remaining balance to you.
It’s important to note that in both Invoice Factoring and PO Financing situations, the lender is most often directly involved with your General Contractors, customers, suppliers, and vendors.
Merchant Cash Advances (aka Daily Debit Loans) are “quick-cash” solutions designed for industries with a daily cash flow cycle, such as food and hospitality or retail. MCA repayment involves a daily or weekly draw from your checking account, which can make forecasting your cash flow even harder than before. While MCAs work in industries like hospitality or retail — where a daily cash flow can potentially meet or exceed the daily debit — it is almost impossible for commercial construction companies to keep up, especially in the months after a project is completed but the loan is still active.
MCA loans are very easy to get and can be deposited in your account within days which make them very tempting to take on. However, like most things that are easy they can come with some significant drawbacks. Anytime the repayment cycle of your loan does not fall in line with how your revenue is realized you will likely have a problem. When those problems come the solution is NOT TO TAKE ON ANOTHER ONE!
Read why MCAs don’t work for commercial construction subcontractors.
Borrow capital to grow.
Once you have identified the goal of your funds and the potential funding sources, it is time to make sure you and your company are ready to capitalize and mobilize. Forgive us one more aspirational quote, “When opportunity knocks, be ready to open the door.”
What do you need to do to maximize the potential benefit this influx of cash could give your business?
- Make a game plan for the funds based on your goal.
- Get your business and personal financials in order. That includes credit reports and tax returns.
- Establish relationships with other partners and vendors. If any of them can cut you a deal if you act quickly, that can be part of your funding strategy.
- Talk to the experts about your funding options and YOUR unique business needs.
Growing with Mobilization Funding.
If you are a commercial construction subcontractor or manufacturing company looking for a funding partner who can help you grow and succeed — you’re in the right place. We have structured our lending platform and services to serve the unique cash flow cycles of your industries. We work WITH you to create the unique lending solution that works FOR you.
You can apply online here, or give us a call at 813-712-3073. (Don’t worry — a real person will answer the phone and be ready to help you.)
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The construction industry is poised for a bit of a shock in 2020, as rates across multiple lines of insurance — including General Liability, Automotive Liability, and Umbrella or Excess Liability — are set to increase. According to Willis Towers Watson’s Insurance Marketplace Realities 2020, the rate increase predictions land anywhere between 5% to 30%, depending on the coverage line.
To get a better understanding of these changes and how you can prepare for them, we sat down with Dylan Burns, Senior Associate in Corporate Risk & Broking at Willis Towers Watson.
“The commercial insurance rates have been down for the past 3 or 4 years, but as the insurance market has changed, especially in the construction industry, rates are up across multiple lines of coverage. Many contractors may not be aware of this. If you’re not working with your broker and discussing alternative strategies, you’re probably already behind the eight-ball.”
Burns shared five questions you should bring to the table when you sit down with your broker.
1. What are my options? What are we doing to prepare for my renewal?
You may be used to relatively “easy” renewals, but with the marketplace constricting and carriers making dramatic changes to policies that is no longer the case. “Even if you’ve known your broker for years and have a good relationship with them,” says Burns, “now is the time to sit down and review your policy together. You need to build a sustainable strategy. Not just for 2020, but for the next two or three years.”
What can you do?
Get proactive. Prepare for your renewal by scheduling a meeting with your broker and bring all your necessary documentation for review. The following is a short list of what will be needed for review:
- Change of address, if applicable
- Number of employees
- Number of vehicles
- New equipment purchases
- New service or product offerings or other changes to business practice
- Claims data – including detailed information about larger claims and what the company has done to mitigate those types of incidents in the future
Failing to prepare for your renewal can have costly consequences. Not being prepared, delaying information to your broker/carrier and not scheduling pre-renewal loss control meetings all delay the process and limit the time underwriters will have to work on your renewal. This typically leads to less than favorable renewal terms for your company and potential premium increases. Ouch.
It also doesn’t hurt to shop around. Your broker may only have access to a select group of carriers, and there may be other carriers that offer better plans for your business. “Checking what’s out there for you can save you a lot of time and stress in the long run. Even if that may be with another broker,” Burns says.
2. Does my current carrier have discounts for fleet tracking and other safe driving measures? Are we taking advantage of those?
Rising third-party litigation and skyrocketing verdict outcomes have kept Auto Liability rates on the rise for years now, and according to the experts 2020 is no exception. The good news is many carriers offer discounts for safe driving technology and programs.
What can you do?
Implement a safe-driving program at your company. “Brokers and carriers can actually help with that,” says Burns. “Carriers want to work with companies that take pride in their safety. By leaning on their broker, a business can show how they’re taking control of their safety which is attractive to carriers and can afford potential premium discounts.”
Your safe-driving program should include continuous education around distracted driving, fatigued driving, and aggressive driving. If you haven’t already, install fleet tracking in your vehicles. Modern fleet tracking systems do a lot more than just GPS — they can detect and record speeding, aggressive driving, fast braking, and other no-no’s on the road. Some even have historical playback capabilities, which can be useful in claim disputes. This may seem like you want to micro-manage them and perhaps you do, however, the real benefit is the cost savings to the business. Make sure you TELL your employees why you are implementing this program and what the benefits are to your employees so you can manage the message the right way!
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3. What is my company’s Workers’ Compensation Experience Modification Factor (E-Mod)? What does that number mean? How can I improve it?
Workers Compensation is one of the few insurance lines not experiencing a rise in rates. In fact, the prices are so low that it has some carriers worried about profitability. But that doesn’t mean you shouldn’t be paying attention to it.
“Some carriers are looking at Consent to Rate policies rather than the state-filed rates, in order to improve profitability,” says Burns. “Regardless, knowing and improving your Emod is important to your business. For one thing, the higher your Emod, the more you’re going to pay for Workers Compensation. Also, many General Contractors won’t even consider bids from companies with an Emod over 1.00. That’s especially true for government contracts.”
Work with your broker to understand your Emod factor and how you’ve gotten to that number. Each claim affects your company’s Emod, but how each claim is characterized influences the potential impact.
What can you do?
“Talk about safety every day,” advises Burns. “The more you can do to increase employee safety and reduce incidents, the better.” Wellness initiatives, improved communication methods, mental health counseling and substance abuse recovery programs can all make your team safer and reduce the chance of an accident.
Getting employees back to work — even to a light-duty job while they recover — is good for everyone. Employees experience quicker recoveries and less morale decline. Employers can better control the costs of absent employees, and shorter work restrictions can improve your Workers Compensation rates.
4. Are you aware of additional premiums carriers are looking to receive in 2020?
Construction umbrella and excess liability policies are facing some of the biggest changes in 2020. Carriers experienced an excessive number of claims break the umbrella or excess limit. To course-correct and remain profitable, carriers are now raising minimum premiums much higher, from an average of $1,000 per million to $2,500 per million or more.
“The General Contractor has umbrella or excess liability, but more and more are requiring that subcontractors match their umbrella policy,” says Burns. “At the same time, those policies are becoming more expensive and more challenging to acquire.”
What can you do?
Reviewing your coverage plan is good advice no matter which line of insurance we’re talking about.
“Insurance policies are like an encyclopedia,” says Burns. “They’re long, and they’re full of industry and legal jargon. Ask your broker to walk you through it. Find out how your policy responds in the event of an incident. What factors can you control? Which are fixed? What is negotiable? If this coverage is going away, what are my options? Your broker can walk you through all of this.”
5. What can I do from my carrier’s perspective to help with my coverage and rates?
This is the golden question. As the insurance marketplace becomes more constricted, carriers are looking for best-in-class risks. That means you need to put your best foot forward during the application process. You’ll need to provide thorough documentation, including loss experiences and historical exposure. “The carriers don’t want any surprises. They want to understand your business, its history and the outlook for the next couple years. Underwriters understand losses occur, but they want to know the story of why those incidents had occurred and what the company has done to mitigate those types of claims in the future,” says Burns.
Your first step is to get all your documentation together and schedule that check-in with your broker. “Carriers rely on data more and more to predict risk. You need to provide as much information as you can, and in the best context possible,” Burns says. “We as brokers help with that. We dig a little deeper. We say, ‘You have had this loss. Tell me about that.’ It allows us to tell the best story to yield the best possible result for you.”
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Slow payments in construction impact everyone, but subcontractors get hit the hardest. After all, you’ve already financed the labor, materials and equipment to get the work started; a delayed payment means you can’t replenish your cash reserves and you may have trouble making payroll or other critical payments.
Most subcontractors make up the difference with personal savings or the wrong funding option for their business like a Merchant Cash Advance. Worst case scenario, work stops completely while you chase your money, enforce your lien, or borrow money from another project to manage the cash flow crunch on another which now puts both projects at risk. What do we mean by that statement? We mean something like choosing to NOT pay a material supplier once you are paid from Project X, with the plan to just do it next week when the check comes from Project Y.
It’s a nightmare, right? What if it didn’t have to be?
It doesn’t. Automation and technology are already starting to improve the payment infrastructure in the construction industry. But there’s something EASY and FREE you can do to start improving your cash flow right now.
You can have an open and honest conversation about money with your General Contractor. If you’re thinking, “Dream on. I’m not going to admit to my GC that I need money,” then this article was written just for you.
General Contractors, you should keep reading, too.
Come armed with empathy, not emotion.
Nobody is going to deny that slow payments in construction are the norm rather than the exception. PWC’s cash flow survey showed that contractors wait an average of 83 days to get paid! That applies to the owner delaying payment to the General Contractor, GCs delaying payments to subcontractors, and so on. When you talk to a General Contractor, start from a place of empathy for the GC’s position and then share your own.
“We both want to do the best work possible, and we both know the cash it will take to get that done. If the owner fails to pay on-time, it’s going to affect us both. Here’s how it will impact me. I don’t have the cash flow to cover three months of payroll, so I will probably have to dip into my personal savings or — God forbid — get a very high cost loan that will then debit my checking account every day putting tremendous pressure on my cash flow that is already an issue due to slow payments.”
It’s true. Find out more about Merchant Cash Advances here.
This may seem like admitting weakness, but it’s actually the opposite. Stating what is true and real, without emotion or fear, is exactly the kind of calm confidence people respect and look for in leadership. This is especially true when you are talking to someone in advance of a problem. You are not threatening or blaming, just informing them that if X happens then Y will be the result. We are partners in the outcome; how can we manage it together and what options are there to make sure this does not happen?
Support your stance with the facts.
The next step is to bolster your position with facts. Bring your numbers to the table. Show the GC your expected cash flow on the job, and your cash flow projection for the job’s lifetime.
All subcontractors and GCs should understand that on a construction project there is a certain point in the project when the job will cash flow itself. That time is NOT at the beginning of the project. Each new project requires an investment of cash to float payroll, material orders, and other job costs until you can invoice enough against the contract – this is true for the subcontractor and the GC. The point at which you are able to get enough profit out of the project to float payroll and other job costs is the point at which the job starts to cash flow itself.
If you need help determining the cash flow of your project, we created a guide you can use. Click here to get your sample Project Cash Flow Worksheet. (Don’t forget the instructions!)
It’s hard to deny numbers in black and white, and it’s helpful for General Contractors to see how a slow payment affects your entire company.
Once the General Contractor understands your perspective, it will be much easier for them to empathize. Now, take it to the next level.
Bring the GC a solution to the problem.
If there’s one thing a GC appreciates, it’s a subcontractor who PERFORMS without adding stress to the project. You can be that subcontractor. All you have to do is come to the table with a plan.
You’ve addressed the elephant in the room — slow payments on this job are going to be a nightmare for everyone. You’ve shown the numbers — here’s how it will affect me, my company, and my crew. Now it’s time to wipe the worry from your GC’s face. Give them your plan to succeed even if (when) a payment gets held up.
Share your funding plan for the first 90 days of the project. You have one, right? If not, click here to get started. Ask the GC if they’ve offered incentives to the owner for on-time payment. If so, you can double that savings by offering a discount to the GC if they can guarantee 30 days net payment. You’re in good company if you do — according to Rabbet’s 2019 Construction Payment Report, 72% of subcontractors said they’d do the same.
Bring it back to basic numbers — if we meet X pay schedule, the overall savings on the project will be Y%. That’s a powerful argument for the GC to make to the Owner or Developer, and you just hand-delivered it.
Flip the script on slow payments in construction.
General Contractors, are you still reading? Good. This part is especially important for you. We need to change the tone of conversation around payments in construction. ALL Subcontractors are NOT bad with money; they’re running a business with a payment environment unlike anything in any other industry. Subcontractors need you to be a partner in this, not an adversary.
Subcontractors, remember: You and the GC are on the same side. They hired you to do the great work you do every day. If you’re not getting paid on time, chances are it’s because the GC hasn’t been paid yet, either. Work together to come up with a plan that keeps both of you working and removes the stress from your cash flow.
It all starts with a simple conversation.
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If there were one skill you could learn that would make you a more effective leader and business owner, would you invest in mastering it? Of course, you would! Active listening, the act of giving your complete, undivided focus to what someone is saying, can improve your workplace culture, help you build relationships with partners, and even help keep your employees safe.
Active listening is listening with 100% of your focus on the person who is speaking. It means paying attention to body language as well as what is actually said. Active listening exercises empathy and cognitive thinking, so you understand the issue from the other person’s perspective as well as your own.
Chances are you’ve wished someone else would practice more active listening, even if you didn’t know the literal definition. Have you ever tried to talk to a General Contractor or Project Manager about an issue on the job, only to have them constantly check their phone, cross their arms and sigh defensively, or interrupt you with what THEY think the issue really is? That’s the opposite of active listening.
It’s frustrating, right? When someone isn’t listening with intent, it can leave you feeling frustrated, ignored, and dis-empowered.
Now, can you think of a time when you haven’t given 100% of your attention to someone speaking to you? Whether it was a colleague, an employee, a spouse, or a child, chances are you left them feeling the same way you felt when you were the one not being heard. Frustrated, ignored, and shut down. Ouch.
Luckily, you can teach yourself to become a better listener. All it takes is a little bit of discipline, and a few helpful tips to get you started.
Active listening requires more than your ears.
Peter Drucker, the godfather of modern management thinking, has this famous quote about listening, “The most important thing in communication is hearing what isn’t said.” A lot of communication is actually non-verbal. Researcher Albert Mehrabian defined communication as roughly 55% body language, 38% tone of voice, and 7% actual words spoken.
If you’re only hearing the words, you’re only getting 7% of the conversation. That’s bound to lead to misunderstandings and negative emotions.
Active listening requires you to pay attention to the other person’s body language, the historical context around what is being said, and the emotional impact the topic has on the speaker. It means being an active participant in the exchange, gently challenging assumptions and offering new perspectives.
The benefits of active listening far outweigh the effort it takes to master it.
Active listening increases productivity.
If you successfully model active listening with your team, you can also teach them through example to actively listen to you and each other. When your team is participating in active listening, they understand and retain more information than when they are distracted. This increases the likelihood they can complete tasks with fewer questions, misunderstandings, and, most important, costly errors and corrections.
Active listening improves workplace safety.
It’s important for your team’s safety that they feel empowered to raise concerns, ask questions, and show vulnerability. Otherwise, they are apt to try and solve challenges on their own to the best of their ability. That could mean working alongside unsafe workers from another company, or failing to perform a task correctly because they didn’t ask for more instructions.
As the business owner, 100% of the consequences of your crew’s actions will fall on you. In order to keep them as safe as possible, you need to be 100% involved in the conversations and decisions that impact their safety.
When you create an environment of active listening, your whole team is safer. Team members know they can admit they have questions or are unsure of instructions. This level of vulnerability can, in and of itself, reduce workplace accidents. And, should an incident occur, active listening can help you quickly and more effectively gather information that will be important when it comes to the employee’s Worker’s Compensation claim.
Active listening creates a better workplace culture.
When your team trusts you to listen, their overall trust in your leadership increases. This can have dramatic effects on your workplace culture. Team members feel empowered to share ideas and solutions to challenges. You may find you have innovators and future leaders hidden among your workforce, just waiting for the chance to speak up and be heard.
Active listening is good for business.
One important piece of effective listening is creating a safe space for the speaker. That means putting aside distractions and, most important, your desire to speak. This requires a quiet confidence in yourself. You don’t need to rush to prove to the speaker that you know how to solve their problem. First, you’ll make sure that you understand the problem and how it is impacting the speaker.
This is an incredibly powerful tool in business. Most of us are in such a rush to answer the question, fix the problem, and close the deal, that we forget to pause and actually listen. This rush to a solution often comes with a lot of energy behind it, and the combination can quickly lead to misunderstandings and conflict.
Active listening, on the other hand, removes the conflict and focuses on creating an environment where issues can be discussed in detail. Solutions can come later. For example, let’s say you’re a construction subcontractor, and the Project Manager for the General Contractor on a job approaches you with an issue. They believe your crew carelessly disposed of excess materials and created a safety issue. You’re almost certain it wasn’t your guys.
You have three possible choices in how to respond:
Choice #1 Argue & Defend: This is the “brick wall” response. Refuse to listen to the other person’s point of view, shout down any arguments, accept no responsibility, and reach no satisfactory conclusions. Good luck getting the other person to listen to you when it’s your turn to bring up an issue.
Choice #2 Jump to a Solution: This is where you listen to the verbal problem alone, and you rush to solve the problem as quick as possible. Unfortunately, without understanding the WHOLE problem, you’re unlikely to solve it. Both sides end up feeling frustrated.
Choice #3: Listen with Intention. Listen carefully, paying close attention to body language and tone of voice. Let the other person talk as long as they need to. Ask clarifying questions, and respond first with empathy rather than solutions or defenses. When you choose this track, you show the PM, and the GC, that you will own up to issues you might have caused, and will help solve ones that you didn’t! That’s a valuable partner.
Now imagine the next time that GC sees your company’s name on a bid. They remember how you performed in a moment of challenge. Calm, confident, and willing to listen. You’re building a reputation as a trustworthy, level-headed, and collaborative problem-solver, just by listening with intent. Relationship-building is paramount in construction, and really just about every other industry, too.
5 simple tips for more effective listening.
Most people think they’re great listeners. They make eye contact, refrain from interrupting the speaker, and can recite back what was said. That’s NOT active listening. That’s basic listening. How much of what you heard did you understand? Did you communicate to the speaker that you cared about the outcome of this conversation? Did you help them find possible resolutions?
Here are five simple things you can do to become a better, more intentional listener.
Create a listening environment. When someone approaches you and asks you to listen, check to make sure you actually can at that moment. Are there distractions you will not be able to ignore until they are completed? Are you in a noisy work environment where you are likely to be interrupted? Show the speaker you care about this conversation by creating a time and space where you can listen free from distractions. If necessary, ask for five minutes to wrap up an urgent task that is likely to steal your attention. Then, close the door or walk away from the larger group, mute your phone, and focus your attention on the speaker.
Act like a good listener. Make sure your body language is relaxed and attentive, not defensive or distracted. Make eye-contact with the speaker. These actions send a signal to them that you are listening and sends a signal to your own brain that it is time to get down to the business of listening.
Listen with your eyes. Pay attention to the speaker’s body language. A lot of our communication comes from the way we act, rather than what we say.
Listen with your heart, too. Empathy is a key part of active listening. Understanding how the other person is feeling and validating that experience builds trust between the speaker and listener. It also helps you generate ideas later in the conversation that can solve the problem and neutralize potential negative responses.
Ask questions that prompt new lines of thought. A lot of people assume good listening means sitting quietly and saying nothing. But, that actually makes it harder for you to focus on and understand the concepts being presented. It’s better to ask clarifying questions and prompt the speaker for more details when needed. It helps you stay focused and lets the speaker know you’re invested in the conversation.
Asking questions is also an effective way to get people to challenge assumptions, consider alternative perspectives, and accept new ideas. Rather than telling someone what they need to do to solve a problem, ask questions that help them see the solutions for themselves.
Listening isn’t a talent; it is a learned skill that comes from discipline. It takes practice to become a habit, but everyone can do it. The potential benefits — a safe, productive, and happy team, as well as a positive reputation with business partners — make the effort well worth it.
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Most subcontractors need capital to cover the costs of a new project before the first invoices get paid. The high costs of mobilizing on a job — plus the reality of waiting 30 – 60 days or more for your first payment, all the while meeting weekly payroll and regular business expenses — would be hard on any business. Add in the 10% of each payment being withheld for retainage, and there’s a lot that can go wrong. Which is why so many subcontractors look for alternative funding solutions, like merchant cash advances (MCAs) or invoice factoring.
MCAs are a notoriously risky venture for a subcontractor, but what about invoice factoring? The answer is less straightforward. Invoice factoring can work for subcontractors, but it also poses risks of its own.
What is Invoice Factoring?
Business invoice factoring is not a loan; it is an advance of receivables. Here’s how it works:
- You submit an invoice to your General Contractor.
- The invoice factoring company will verify the invoice with your General Contractor and get their approval and acceptance of the invoice amount and that it is in fact owed to you.
- Once approved, the factoring company will advance you a percentage of that approved invoice, usually between 70% and 80%.
- When the factoring company receives payment from your general contractor, it will repay the amount they advanced to you, plus their fees (typically 1% – 5% of the total invoice amount).
- Any remaining balance will be sent to you.
Invoice Factoring and Construction Subcontractors
You know how tough it is to get a loan from the bank, so despite its challenges, factoring can be a good way to get the cash you need to make payroll and cover your expenses. Especially if you are working on multiple projects, a good relationship with a factoring company can really help your business overcome a cash shortfall. If you haven’t worked with an invoice factoring company before, do yourself a favor and research your options before you sign an agreement.
First, look for a company that works with construction and understands your business. This will be your first hurdle, since only a handful of invoice factoring companies will work with construction subcontractors. The vast majority have written (or unwritten) policies against you. From their perspective, some of the payment terms and contract language for construction subcontractors is simply too complicated and too risky.
If it sounds too good to be true, it probably is. Beware a company that offers to advance more than 90% of your invoice. Remember, the average advanced percentage of an approved invoice is between 70% and 80%.
Be honest with yourself when it comes to payment schedules. Delays in construction receivables are almost inevitable. Most factoring companies will charge a fee for the first 30 days the invoice is outstanding and then an additional fee for every 5-10 days after the first 30 days. Make sure you consider honestly the actual time between invoicing and receiving your payment so you will know the actual factoring costs and adjust your project bid accordingly.
Invoice factoring companies can be a great help to your cash flow, however most will require that they have the first position lien (UCC-1) in order to approve your invoice. That means if you have a current MCA or bank line of credit you are unlikely to qualify without first paying them off or getting them to subordinate their UCC position to the factoring company. This can be done but it can also take time to accomplish so make sure you account for the time it may take.
Invoice factoring, by its nature, requires the cooperation of your General Contractor. Your GC will have to approve or verify your invoice and through the Notice of Assignment (NOA) the factoring company serves on the GC they will then be obligated to send the payment directly to the factoring company. Some GCs have policies against factoring receivables, while others may be resistant to agreeing to this change, you should read your contract and have the discussion with your GC to let them know what you are trying to accomplish and how it will help their project overall by helping you to perform.
Lastly, invoice factoring can be an “all or none” solution. Many factoring companies require you factor all receivables for that particular job, even if that wasn’t your original plan.
If you rely on factoring, you must ensure you have enough cash on hand to make it to that first pay app. After the first pay app, be extra careful to spread out the advance in order to cover your project costs through your next billing. If you’re working on multiple projects, that may result in taking funds needed for another job — essentially robbing Peter to pay Paul, which is a risky option.
Other funding options for construction subcontractors
If factoring falls through, many subcontractors will turn to an MCA. Don’t! MCAs seem like a shiny, quick fix, but too often one MCA leads to a crushing cycle of debt that can seriously damage your company’s cash flow and overall financial health (and your sanity).
Read the Guide to Merchant Cash Advances.
There’s also Accounts Receivable Financing, which is similar to factoring in that your unpaid invoices are being used to secure funding. In AR financing, your accounts receivable is the collateral for a line of credit.
The truth is that, while options like invoice factoring and AR financing may help, they don’t solve the REAL problem subcontractors face. You’re short on cash from Day 1, and playing catch-up until retainage checks start getting paid.
You need money before the invoice just as much as you need it after.
The key is to secure financing before the project begins, and then work with a partner that understands your business’s needs and challenges.
That’s where we can help.
We offer funding when you need it AND we know the right factoring companies to work with.
Invoice factoring, traditional bank financing and MCAs were either under-servicing, or actually hurting, a lot of great construction subcontractor businesses. They needed a better option, so we created one.
Mobilization Funding offers funding when you need it — up front, before the job even begins, so that you can cover project costs, from bond premiums to payroll, materials, equipment rental costs, and more. Rather than advancing cash based on your credit worthiness, we’ll review your contract and schedule of values and work with you to understand your needs and generate a custom funding and repayment schedule.
And, if we find that invoice factoring is the best option for your business right now, we are going to do the right thing and happily connect you with a factor that knows how to work with commercial subcontractors and contractor companies. Call us at 813-712-3073 or click here to get started.
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