Construction Loans Archives - Mobilization Funding

A growing contractor, been in business about 3 years, starting to get a handle on cash flow funding and generate some strong partnerships and leads with getting renewal contracts on projects, feeling good about the direction your business is headed with multiple projects going on at the same time, but then you check your business bank account, and it looks like the barren desert, with little to no funds! You are in a cash flow drought! Does this sound anything like you? This is common in construction! This industry is unique in the sense that contracts are paid after the work is done, and payments are often not even guaranteed by a specific date or on a regular cadence.

Construction contractors are often paid differently compared to other industries due to the unique nature of their work, and there are some key differences, one of which is project-based payments. This is when contractors are typically paid based on project milestones or phases, such as a payment after completing the electrical work on an apartment complex. Another similar form of payment is progress billing, which is when a contractor submits monthly invoices for the work completed on a project. As one can guess, all of this gets tricky and makes predicting payments and cash flow on a job challenging.

This is due to the fact that there are so many circumstances that go into completing a project, and unfortunately, things do not always go as planned. Oftentimes, work on a project can risk getting delayed due to weather or seasonal conditions such as hurricanes or blizzards. All of this can affect cash flow funding because payment schedules get delayed. The economy can greatly impact construction work too. The availability of dedicated and skilled workers and labor force is a challenge in and of itself. Additionally, in retainage on a job, a percentage of the payment is often withheld until the project is completed to ensure all work is done to the client’s satisfaction, typically 10%, which can greatly create a flux in cash flow, especially if it comes much later than anticipated. Lastly, if not properly accounted for in their bids or pricing structure, insurance, and risk premiums add a lot of cost, thus heavily influencing cash flow structures.

With all this being said, one can easily picture the chaos of trying to manage cash flow cycles, predicting when gaps in cash flow will arise and anticipating when additional funds are needed on construction projects to keep them moving. More times than not, gaps exist before the projects even begin because there are so many material costs and labor fees needed upfront in order to get mobilized on the project. What if there was a solution, or finance partner that could provide funding when you needed it most? As in, before the project started, or right when your cash flow fell into the red zone?

Today may be that lucky day! There is a such thing as Cash Flow Funding, in the construction world, it is better known as Mobilization Funding. This unique style of funding, is a type of business financing where a loan is provided based on the company’s expected cash flows. Essentially, the loan is backed by the money a company anticipates generating from its project’s contract and milestone payments. This uniquely structured loan program is designed to help a company execute the work they have available to them by providing access to cash at the start of a project or contract. When the company has revenue in the form of a contract, purchase orders, or a service agreement, Mobilization Funding can help them. These loans provide the money needed to pay for labor, materials or other project-related costs before the company invoices their customer. This allows the company to get started on the project in the most efficient manner by removing the barrier of, “Do I have enough cash to do it the way it should be done?” They can get on a project with the right amount of labor, order the materials needed in the best form and timing, use the right equipment, and so on.

Why is Cash Flow Funding or Mobilization Funding Important?

Convenience: Funding when cash is needed most allows businesses, especially those without direct lines of capital or banking relationships or an open line of credit to, access immediate funding. This is particularly useful for construction companies, as many contractors have irregular revenue patterns or those that generate substantial cash from finished projects, and their cash surplus is usually tied up in other projects.
Stability: Positive cash flow ensures that a business can cover its operational expenses, such as paying suppliers, employees, and other operational costs. This is crucial for maintaining day-to-day operations and avoiding financial distress.
Growth: With adequate funding capabilities, businesses can reinvest in their operations, expand their projects, and take advantage of new contract opportunities without the need for additional funding. This construction cash flow 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. You can take on the extra work without putting a financial strain on the business, but still do the work and grow the business. MF’s loan structure is designed to be paid back as you get paid on the project.
Success Indicator: Cash flow is a critical measure of a business’s financial health. Positive cash flow indicates that a company is generating enough revenue to meet its obligations, while negative cash flow, for prolonged periods of time can be a warning sign of potential financial trouble.

In summary, the cash flow funding model at Mobilization Funding is vital for helping construction contractors and manufacturing businesses continue to grow, while taking on new contracts, and keeping them cash flow positive throughout their projects. 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.

Having a financial partner, especially one who is an expert in cash flow funding, can greatly improve the strength of your company, and that is exactly what Mobilization Funding can provide you! You DON’T need to qualify for a loan in order to receivefunding advice.

Mobilization Funding also offers a network of experts outside of the financial aspect in industries like insurance, legal, equipment, and more who are ready to help when one of our clients has a question. After speaking to one of our cash flow experts, you may even discover you don’t need a loan, you may just need a cash flow tool, like this one, PROJECT CASH FLOW ESTIMATION TOOL that helps you analyze where your cash is coming and going throughout your various projects. Having this solid understanding, a partner you can trust, and even a financial capability letter from that partner will also improve your bid, winning you more work. In closing, the goal is to help set your business up for success!

The cash flow funding model and cash flow consultants at Mobilization Funding can provide you with stability, convenience, a pathway to growth, and peace of mind that funds can be available when your cash flow runs dry.

Today, we are going to talk about a variety of alternative lending solutions and why they exist. Why this topic? Well, the construction industry is dynamic, as you know, and one day, the likelihood is pretty high that you will need some type of financing. Given the state of how contractors get paid and payout, traditional lending sources and loans don’t always work. As we review this, don’t assume needing lending options for funds is a bad thing! One of the most common mistakes business owners make is to view debt as a thing to fear rather than as a tool for growth. The reality is plenty of business owners borrow money not because they need it to survive but because it is the smartest way to capitalize on an opportunity, run the business, or manage the cash required to operate the business in the most effective way.

Financial lending solutions are not one-size-fits-all. In order to build a financial plan that will allow you to run the business and support your plans for growth, it is important to use the right funding option for each opportunity. Using debt or other financial instruments for those purposes is excellent; however, oftentimes, business owners find themselves taking on debt to fix a problem or series of mistakes that were made instead. In these situations, debt can also be good and certainly can make the business owner and business feel a lot better, but it still may not be what the business needs to grow. Here is a list of alternative lending solutions your company can take advantage of, when it is best to use them, and when it is not.

The first option is the Traditional Bank Line of Credit (LOC).

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 of a new job. Lines of Credit are meant to give you access to cash when you need it and then be paid back down when you are paid for the work you do. A bank wants to see the LOC drawn on and paid back down frequently. They do not want to see it used like a long-term loan. That means using it to bridge the gap in times when cash is needed is ideal. Making payroll every week before you are able to invoice a project, paying the supplier bill that is due this week but you will not receive your payment for that material till next month, or investing the cash needed into some pre-construction work for a new project, you will not be able to invoice for 30-60 days. The downside to an LOC is this: The size of your Line of Credit is typically 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 and need other lending options to support your growth.

Next is the Small Business Administration or SBA Loan. This is a long-term loan from a bank with an SBA Guarantee. The first thing to know is the SBA does not issue loans, banks do. What does a guarantee mean? Basically, it means that if the loan is made to you under certain terms and conditions that the SBA approves in advance, they will guarantee some portion of the loan the bank made to you. In the event you don’t repay the loan, the bank can go to the SBA to be repaid a portion of the loan (typically 80%). 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. The loans also have maximum loan amounts and terms for repayment that need to be considered. SBA loans also 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.

Another option when looking at alternative lending solutions within the construction industry is Invoice Factoring. Simply put, invoice factoring is a way to use the Accounts Receivables (the money you invoice your customers and they owe you for the work you performed) of the business to generate cash by selling those invoices to a factoring company. The factor will give you an advance on the amount that is owed to you (usually about 80%), and then they will wait for your customer to pay under the normal terms of payment. When they receive payment from your customer, they will take the fees that are owed to them and then remit the balance to you. This process can be repeated over and over each time you generate an invoice for your customer(s). While invoice factoring shrinks the time between when you invoice and when you receive some cash, it doesn’t get you funding before the work starts. While financing your company between payments is absolutely a normal part of the construction industry, many subcontractors and general contractors have a negative perception of factoring. There are several reasons why general contractors have a negative view, but the most common reason is it affects the contractual terms they have with you in the subcontract agreement and their ability to set off payments that are owed to you. When a factor purchases a receivable from you, they typically will require that the invoice is verified. The process of verifying that invoice involves the GC certifying they do, in fact, owe you the money invoiced and that they will pay that invoice when it is due and in full. It’s that step of verification that the GC typically does not like as it removes their ability to set off that payment in the future should they want to, based on something related to your performance on the job, a negative change order, or one of your vendors is required to be paid.

Similar to factoring, there are 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 run your project and overall business. For both invoice factoring and ABL credit, you need to make sure you aren’t paying for future growth with the 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 the operations of the business. Invoice factoring and ABL lines of credit require great administrative capabilities in your business and financial discipline. When you receive money from your invoices, it is critical to make sure you use the funds for the project you were advanced on—paying the subs, vendors, and suppliers when you are paid. Maybe you don’t pay them in full, or you provide partial payments, but nonetheless, the money you receive is marked for specific job-related costs, and if you use the money for something else, you will not have that money 30-45 days later when it is time to pay them, and that can be the cause of major issues for you on that project. Then those major issues can carry over into the main business!

As much as I don’t think this next option is one of the best alternative lending solutions for construction businesses, we must also address the Merchant Cash Advance option. 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. These are the daily or weekly payment “loans” that have been out and available for the past 10+ years. You can get funded very fast, in just a matter of 24-48 hours, and the deposit will come straight into your business operating account.

Here’s how they work: The MCA lender will assess the number of deposits and activity you have in your checking account on a monthly basis and then provide you an “advance” on those future deposits. They then add their advance fee to the amount that is being advanced to you (for construction that fee is typically between 33% – 50%). The repayment of the advance is typically between 6-12 months. I am here to tell you as clearly as I possibly can this is NOT a financial product for construction contractors.

Last but not least, a loan program designed specifically for construction contractors, Mobilization Funding!

This loan program is designed to help a company execute the work they have available to them by providing access to cash at the start of a project or contract. When the company has revenue in the form of a contract, purchase orders, or a service agreement, Mobilization Funding can help them. These alternative lending solutions provide the money needed to pay for labor, materials, or other project-related costs before the company invoices their customer. This allows the company to get started on the project in the most efficient manner by removing the barrier of, “Do I have enough cash to do it the way it should be done?” They can get on a project with the right amount of labor, order the materials needed in the best form and timing, use the right equipment, and so on. That means You, the business, can do the work in the most efficient manner and not lose sleep about how you are going to make payroll each week or pay the vendors, subs, and suppliers.

This construction financing program was 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. You can take on the extra work without putting a financial strain on the business but still do the work and grow the business. The Mobilization Funding loan structure is designed to be paid back as you get paid on the project.

Having a financial partner can greatly improve the strength of your company. A financial capability letter from that partner will also improve your bid, winning you more work.

Mobilization Funding’s client service and project funding partners work with their clients to align your repayment plan to your pay apps, minimizing the strain of repaying a loan on top of managing your business. Finally, they have a network of experts in industries like insurance, legal, equipment, and more who are ready to help when clients have a question.

All of these alternative lending solutions can help your business go from surviving to thriving, but remember, understanding your cash flow cycles to incorporate repayment of borrowed capital will also be the key to its success!ng the right talent this industry desperately needs.

In November, much of my Mobilization Funding team and I attended The Dirt World Conference in San Antonio, Texas. It was an opportunity to join together, get educated and begin to strategize on some of the latest trends in construction! The focus of the meeting was really centered around the industry’s greatest resource — its people. Aarron Witt, CEO or as he calls himself, the Chief Dirt Nerd, has “studied” the Dirt World’s trends for years. The most common trend every construction company is talking about right now is their largest resource and asset, their people!

One of the single-handed biggest problems in the construction industry, if not the biggest right now is the recruiting of young new talent to the workforce! Unfortunately, the construction industry is on the brink of a crisis, and one day, I fear we won’t have the workers needed to save cities from destruction!! Nearly half of the current construction workforce is expected to retire within the next decade, creating a massive labor shortage. The U.S. will need millions of skilled workers across sectors like housing, infrastructure, and renewable energy. Without an influx of young talent, essential projects like roads, homes, and disaster recovery will be delayed, harming communities and the economy.

Today in the United States, Millennials and Gen Z make up the next generation of the workforce, the working class as we may call it. They are the generations born from 1981 to 2012. They are now in high school or college, or already in the workforce. With this generation it is crucial they see the opportunity beyond the traditional path of a 4-year university degree, then into the corporate business world. Or white-collar work.

Unfortunately, there are some misconceptions associated with the career path in the skilled trades – that is, “blue collar” work. The problem is young workers just aren’t interested in construction. Studies say almost NONE OF THEM want to join the building trades. Yikes! Together we need to come up with a way to establish this essential industry as a pathway forward for our country, and for others to desire this career path as a means to build their own American Dream.

In Aaron’s visits across the world, analyzing, watching, and working alongside various construction companies and contractors, he has found a series of actions that companies do well and set them apart from those that are struggling or even failing. The biggest differentiator with who has the best talent lies in LEADERSHIP. Much like other industries, what holds many people back and stifles careers in construction is often the lack of leadership, a failure to focus on people and culture. These are the essentials that breathe life and longevity into a business, and if they aren’t at the top of the priority list, the ship sinks. People and leadership are the most important asset of every business! If our goal is to attract and retain the next generation of workers, we may need to adjust our thought process and what our culture needs to look like. So, what does America’s youth want in a career? Forbes Magazine reports that nearly ALL of them say it’s important they feel valued, included and empowered at work. This is information none of us can afford to overlook! Regardless of your job title, everyone can be a leader!!! You 100% have the power to impact another person’s life and career just by asking questions, giving advice, and caring.

Since the construction industry is constantly evolving, driven by innovation, environmental concerns, and shifting market demands, staying informed about emerging trends is crucial for businesses seeking to stay competitive. The rise of construction tech is also a big trend in the construction industry and is reshaping how projects are managed and executed. From robotic usage, AI (artificial intelligence), Building Information Modeling (BIM) to drone mapping and 3D printing, finding ways to adopt these technologies not only streamlines processes, reduces waste, and improves safety, but also gives the construction industry a hand up in the recruitment process of young new professionals to the workforce who are interested in careers with technology!

With current environmental, resources, and global changes, finding and reusing resources continues to be another common industry trend. Sustainability remains at the forefront of the construction industry. Companies are increasingly focusing on eco-friendly materials, energy-efficient designs, and renewable energy integrations. Techniques like net-zero energy construction, the use of recycled materials, and green certifications (such as LEED) are becoming standard. By finding solutions and opportunities for sustainable solutions, companies achieve long term cost savings, reduced environmental negative impacts, and increased project values!

Another topic that was mentioned at the conference regarding current construction trends was the emphasis on employee training and safety.

With an increased focus on safety, companies are implementing new safety technologies and rigorous training programs. Wearable tech, such as smart helmets and vests, monitors worker health and improves on-site safety. These are important attributes that can also help recruit the next generation of workers.

Additionally, we know turnover can be a common trend in the construction world, one major factor that is contributing to turnover or lack of job satisfaction is training! It is so important to take the time to train your employees. It doesn’t have to be fancy; it just needs to have some time, focus, and energy put into it. Any one can train! The benefit on construction is so much of it can be on the job training!

One last final discussion around trends and problems in the construction industry was mental health. Believe it or not, construction has one of the highest percentages in drug and alcohol abuse, depression, and suicide rates! Mental health issues are vert prevalent in the construction industry. Here are some statistics and more information that can be found written by Sara Lorek:

With numbers like these, we can’t afford not to make this a priority and something we begin to change! As we all know the majority of the construction workforce is males, and males are less likely to admit struggling and even less likely to seek help. This industry is stressful, the expectations are high, and layoffs are sometimes unavoidable. No longer can we assume everyone on the job site is in a healthy state of mind. Our workforce needs to start looking out and supporting one another and companies would benefit from offering confidential help and support to those who need it!

The industry is at a pivotal time, strong LEADSERSHIP qualities will be essential, from there, balancing innovation with environmental responsibilities, with proper safety and training, and last but not least mental health, problems in the construction industry can begin to be resolved and positive impacts can be made in attracting and preserving the right talent this industry desperately needs.

Within the construction industry, there are several myths I would like to bust! One of them is to change the negative perception around taking out a loan or needing funding! As businesses start out or begin to grow and scale, obtaining additional financing or securing small business construction loans to support cash flow to take on new projects and get mobilized with labor and materials should be seen as a strategic and smart move, as long as it is executed correctly!

Having a solid financial partner can strengthen your business and set you up for success far into the future. Whether you have been in business for years or just starting out, focusing on the financial aspect of your business should be one of your highest priorities. One of the first steps in securing a loan for your small construction business is setting up a relationship with a bank. This is not just opening a bank account – which, yes, is part of it! But the first part is opening a bank account at a bank where you can speak to a live human who understands your business, your industry, and your goals. That is the foundation of being able to gain access to capital and a future lending program.

To obtain a strong lending or banking partnership, it will be imperative to get your financial documents in a clean and manageable order. You can do this in a number of ways, but I highly recommend finding a good accountant and solid tools and resources to manage your cash flow.

According to the SBA (Small Business Administration), only 13% of loan requests were approved at big banks in 2021. That leaves the alternative and private lenders to fill the gap. “No one should be everything to everyone.” Banks and lenders all have their own specialties and consumers they can best support. That is why in the construction world, we have to think “outside the box” and really focus on the relationships we cultivate with one another. We need to find unique lenders to partner with us for financial support and ones that understand construction, our challenges, and what it takes to be successful in the industry. By the way – this means the same for me at MF. If the average bank doesn’t like the construction industry, they definitely don’t like a private lender to set out making small business construction loans to contractors in the industry. My advice here comes from first-hand knowledge and personal experience.

What does it mean to be bankable? A “bankable business” is one that has a strong focus on some of these key areas:

A solid financial track record highlighting your ability to be profitable
Stable and predictable cash flow that is efficiently managed and supported through clean financial documents. Your cash flow reports should allow the business leaders to predict, estimate, track, and execute a variety of financial decisions in order to continue to grow and protect your business. Your financial documents include tax returns, income statements, and balance sheets.
You should care about your credit reputation, as it demonstrates your integrity and discipline in repaying loans and paying bills on time, which ultimately lowers your financial risk and can reduce your cost of borrowing money.
Lastly, you want a relationship oriented, dependable and knowledgeable leadership team who will make responsible decisions, display honesty and trust, and continuously build strong relationships to grow the integrity of the company with a variety of business partners.

When opening a bank account, you will need the following, so be sure to keep these documents in a safe and easy-to-locate place:

Articles of incorporation
Proper forms of ID like driver’s license for any owner of 25% or more of the business (and spouses)
Operating agreement (shareholder, K1 schedule)
Evidence the business is in good standing with the state in which they are formed (this can be done through your state entity search)
Business Profile- Which is an application highlighting what your business does, what it sells, where you are located, who you sell to etc.

This may sound like a lot, but it is in fact easy to do as long as you spend the time to organize it and manage it! Securing small business construction loans when needed for a construction business can be beneficial in multiple ways, as it provides the capital necessary for growth, stability, and operational efficiency.

First and foremost, it can help with your cash flow management. Construction businesses often face fluctuations in cash flow due to project-based revenue cycles, seasonal slowdowns, or delays in client payments. A loan can cover operational costs—like payroll, materials, and equipment—during these periods, ensuring the business can meet its commitments without interruptions. This stability helps maintain credibility with clients, suppliers, and employees

It can also allow you to build your business and invest in equipment and technology to best serve your business and client’s needs. Construction requires substantial investments in specialized equipment, vehicles, and technology, all of which may be necessary to stay competitive. Loans allow businesses to invest in updated machinery or adopt new technologies, such as drones or construction management software, without depleting cash reserves. These investments can improve efficiency and reduce long-term costs.

Lastly, securing small business construction loans can help you scale and expand. Securing a loan can empower a construction business to take on larger projects, enter new markets, or add to its workforce. Having access to capital can be pivotal when bidding on significant contracts or taking on projects that require upfront expenses, positioning the business for future growth and new revenue streams

Ultimately, a well-structured loan can enable a construction business to grow steadily, navigate industry-specific challenges, and stay competitive, all of which contribute to its long-term success. The largest takeaway from this should be number one, it is ok to take out a loan, and number two, ensure you keep good records and organization of your financial records!

When looking for immediate cash or a loan to help your business get the financing you need to start a project or build a product, there are a plethora of options available to you., but which one is right for you? Factoring vs. line of credit. What are the pros and cons of each? Where does a merchant cash loan fit into the equation? To start, they all vary in terms, costs, and payment structure.

When it comes to manufacturing businesses and companies that are making goods to be sold using accounts receivables or purchase order agreements for sales, Factoring is a hot term for a particular loan type. Factoring involves selling accounts receivable (unpaid invoices) to a third party (factor) at a discount. It’s more of a transactional arrangement than a loan. The factor purchases the invoices and assumes responsibility for collecting payments from customers. Factoring is typically used by businesses with slow-paying customers or those experiencing cash flow issues. The amount a business can receive from factoring is usually based on the value of its outstanding invoices and the creditworthiness of its customers who owe them the money.

Factoring vs. Line of Credit

Another popular business loan is a Line of Credit (LOC). A line of credit is a revolving loan facility that provides access to a predetermined amount of funds, which a borrower can draw upon as needed. Interest is only charged on the amount borrowed, and repayments restore the credit line for future use. LOCs are versatile and can be used for various purposes, including managing cash flow, financing inventory, covering short-term cash flow deficits, or covering unexpected expenses. Businesses often prefer them for their flexibility and ability to access funds quickly when needed.

Merchant Cash Advances (MCA)

Something we talk a lot about with clients and the entire network at Mobilization Funding is Merchant Cash Advances (MCA). These are loans you really need to be wary of. I have written a number of articles on these, and recommend you read about his more in detail here as well.

A merchant cash advance is a lump sum advance provided to a business in exchange for a percentage of its future sales or revenues. Unlike traditional loans, MCAs are repaid through a portion of the business’s daily credit card transactions or bank account deposits. MCAs are typically used by businesses with consistent credit card sales, such as retail stores or restaurants, and may be easier to qualify for than traditional loans. However, they can be expensive due to high fees and factor rates, making them less favorable for businesses, especially those with cash flow issues.

Congratulations on your new contract! “What are the project funding requirements?” is one of many common questions that arise as businesses begin to expand and grow. As businesses get multiple contracts at one time, analyzing and understanding your cashflow on each project becomes more important than ever before. First, you need to take a look at your cashflow (on each project and how they roll up overall to the whole company) to ensure you can first perform on the project and maintain or exceed the standards you have established for your team. Ask yourself these questions – do you have the labor force? Access to the suppliers you need? And, is the original plan when you bid on the project still in line today?

Next, get your financial reports in order – the last couple of business tax returns, bank statements for all business accounts, internal financial reports (income statement and balance sheet), debt schedule, Accounts Receivable (AR), and Accounts Payable (AP) reports. These are some of the main project funding requirements you’ll want to have available. Have these organized in one folder and spot you can easily access and send them to your lender when they ask for it. Include any Cash Flow modeling you have for the project and the amount you think you need to get the project done, how you determined that amount of money, and what you will be using the money for (this is commonly referred to as the “Uses” portion of a “Sources and Uses” report / spreadsheet / table).

You can also contact your existing relationships – bank and banker, accountant, controller, and colleagues in the industry. If you have not established relationships already for this exact purpose then you should contact the people you trust (friends, colleagues, and especially other business owners in your industry) and ask them who they use and their experience with them. Look at these options first, research them online, and see what they say about themselves and what others say about them. Do your research and homework on their website, YouTube Channel, and LinkedIn. See who resonates with you and contact those people first to see if they can help you.

Merchant cash advances, or MCAs, are loans that business owners usually look to in a crisis. Think of them as the equivalent to the business version of a paycheck advance loan with high interest and repayment terms that often do not align with what is best for the business. MCA’s are dangerous for most merchants but horrible for construction businesses, and we’ll explain why in this four-part blog series.

In our introduction to merchant cash advances, we will explain what a typical loan looks like and how the fees and costs are charged.

How MCAs Work

The basic requirements to qualify for an MCA are to submit an application that includes a business owner’s personal credit, social security number, business name, business address, and other simple information. Along with this application, they will submit four months of bank statements. Once the MCA lender gets those statements, they can evaluate the money this business receives through deposits. The MCA lenders may utilize different metrics, but they all end up with similar results. That result is that the loan or the advance amount they offer the business is close to the average amount of deposits the company has rolling through their account monthly.

For example, a business has an average of $200,000 in deposits. The lender will build out a repayment schedule for that $200,000, typically with a repayment period between six to twelve months. Before calculating the repayment period, the MCA lender needs to determine the “Factor Rate” they will charge for the loan. This Factor Rate will be the actual cost of the loan to the business. Factor Rates can vary depending on the company, business owner’s personal credit, industry, and other variables, but is typically between 35-50% for construction contractors.

So, with a quick math example, if an MCA lender gives a business $100,000, and the factor rate is 40, the company will repay them $140,000 over the loan term. If that term is 12 months, the interest or fees charged annually is 40%, but if the term is 6 months, the actual annual rate is 80%.

To determine the daily or weekly payment amount, the number of business days in the given period needs to be calculated (a typical month has 21 business days). If it’s a six-month term, they will take the $140,000 and divide it by the number of business days in that period.

6 months x 21 business days per month = 126 business days

$140,000 repayment / 126 business days = ~$1,111.11.

Now, $1,111.11 is the daily number that businesses will have deducted via ACH from their bank account.

Dangers of High-Interest Rates

These factors are a fixed fee or margin that businesses must pay back in addition to the amount they were advanced on the loan. One obvious issue is the loan is very costly in its short-term structure. Secondary to the cost, this loan is based on future receivables (the deposits they receive in their account), whether businesses receive that money or not. So, if companies don’t have enough future revenue to support the dollars they’re borrowing, it can be problematic when those loans need to be repaid—on a daily or weekly basis.

If you’re feeling stuck with payroll and vendor invoices, give us a call before resorting to a merchant cash advance. We’re here to help — (813) 712-3073

Click here to read part 2 of 4 of our Dangers of Merchant Cash Advances series.

In the second part of our series, we’re going to dive into the many ways businesses get hurt by taking out merchant cash advances.

The Repayment Structure of MCA Loans

Problem #1 – Typically, MCA lenders will require a daily or weekly payment that is automatically debited from the borrower’s account. Usually, construction companies are paid 30-60 days from when they invoice for work completed. So, a daily or weekly MCA repayment structure becomes a real problem quickly. It is always worrisome if revenue streams don’t match a payment plan when taking on debt.

Problem #2 – The price of debt to the amount of time to repay the loan AND the margin of the overall business. If a company sells its future receivables at a higher factor rate or at a higher dollar number than it makes in margin on sales, it will have an even bigger problem.

For example, an MCA lender approves a construction business for a $100,000 MCA loan, and the terms of the loan require the business to pay back a total of $140,000 (a 40% factor rate) in a twelve-month period. Let’s assume that the construction business works off a typical 20% gross margin. Now when the business generates $100,000 in revenue (the amount they just borrowed), and they only make a 20% margin, they will actually need $200,000 in revenue to generate enough margin of $40,000 to pay back a $100,000 loan. This example also assumes they remain disciplined enough to use the $100,000 they received from the MCA loan for revenue-generating activities and not to repay an old debt or put out a fire! IF the construction business used the $100,000 they received from the MCA loan for those types of things and they need to generate $140,000 of margin to repay the whole loan, then they would need $700,000 of revenue to produce $140,000 of margin ($140,000 / 20% margin).

See how quickly this can go bad?

The Effect of MCA Loans

The loan itself is fast and easy. (SIDE NOTE: In life, how many things that are fast and easy are actually good for you? 😊)

We discussed some of the problems, but practically what happens next is the worst part. The main reason for getting the loan in the first place (the “fire” or “issue” that needed to be solved) has now come and gone, but this loan and the daily or weekly repayment are here to stay. Slowly every week, the free cash flow of the business is sucked away, and as soon as one month but no more than 2-3 in the construction business, the same “fire” or “issue” arises again, but this time it is at least 2-3x worse. This time it is coupled with suppliers and vendors that have not been paid, or are so late to be paid, that they are causing stress to the business. The reasonable solutions for the company are limited, and the fact that there is an MCA payment every week is an issue for any other lenders. So, the MCA Lender comes to the rescue with another MCA loan solving the immediate pain, but in reality, it only pushes the problem down the road another 1-2 months.

How Customers Get Burned

First, it is vital to know the business owner is rarely talking to the direct lender. The network of folks selling MCA loans are brokers who are paid a commission. There is nothing wrong with a broker trying to find the right lender for a business owner and earning a commission for doing so as long as they represent all the options to the business owner and are upfront about who they are and what they are going to do.

Too often, brokers pretend to be the direct lender; instead, they shop your application around to the actual lenders to get the best possible rate for an MCA loan. Each of these lenders may pull the credit of the business and the business owner, which results in the credit being pulled dozens of times, and those credit pulls will cost the borrower 50 to 100 or more points off their personal credit score.

Don’t let your personal credit and business get flushed down the drain in exchange for a quick “fix.” Let our team light the way out of your financial pit by helping you find the right solution, whether through our program or just some good advice — (813) 712-3073

Click here to read part 3 of 4 of our Dangers of Merchant Cash Advances series.

In the third part of our series, we will illustrate the who’s behind the what. Be on the lookout for loan sharks dressed in brokers’ clothes. As we touched on briefly in Part 2, we will learn more about the broker world and their role in MCA loans.

Who Are Merchant Cash Advance Lenders?

A quick online search will show hundreds, if not thousands, of different websites advertising MCA loans. There are only about a dozen, or fewer, actual lenders. Merchant Cash Advance lenders selling these loans are typically brokers or independent agents with affiliations or relationships with these merchant cash advance lenders. Not all brokers are bad. We work with many brokers or referral sources that may work with clients to find the right solution.

However, a lot of brokers are just selling merchant cash advance loans. These brokers are people that businesses need to be cautious of because a merchant cash advance loan isn’t for everyone. Like our company, Mobilization Funding is not for everyone. We educate ourselves on different lending programs and options like merchant cash advance loans, factoring companies, and purchase order financing because we want to ensure we send people to the right source. We want what’s best for borrowers, even if we’re not a fit for them.

About Broker Networks

The broker network is directly responsible for the ultimate cost of the loan or, at a minimum, can significantly influence it. For example, the actual MCA lender will give the broker the actual cost of the loan and then provide them the ability to increase it within a range to increase their commission. The broker then has the option, or the ability, to markup that loan cost to the borrower. That markup can range from 2% to as much as 10% or more. This additional markup is how brokers make money on the loan transaction. The MCA lenders have set it up so the broker can make a lot of commission, and that commission drives behavior.

Some brokers might present themselves as the actual lender with their logo on application forms or how they introduce their product. Still, most MCA brokers are not the actual lender. In these cases, borrowers are just talking to a loan sales representative looking for a commission—not the source of the capital.

The Cost of the Markup

If a typical $100,000 loan has a 20% factor rate from the actual lender, and the broker marks up that loan an additional 10-15%, the loan cost is now 30-35%. That means the broker will make 10 or 15% of that $100,000 merchant cash advance.

This type of loan is not ideal for construction because the MCA lenders don’t understand the nature of the construction business. If they did, they would not make MCA loans to construction companies. Worse, if they do understand the construction business and don’t care, then that means they don’t care at all about the business or even try to do what is best for them. They are simply trying to do what is best for them at the expense of the construction business.

These brokers don’t lend based on the profit of a business but the total revenue. Construction companies must pay overhead like material suppliers, equipment vendors, and employees from that revenue.

There are less expensive and less painful options for getting ahead of your financial hump. Give us a call to map out your road to recovery — (813) 712-3073

Click here to read part 4 of 4 of our Dangers of Merchant Cash Advances series.

In the final part of our series, we tell the sad but true tale of a contractor who saw first-hand a merchant cash advance gone wrong. We recount this story (one of many) just to illustrate what happens when you only take the easy and fast way out!

Easy Money

A contractor in Texas—65 to 70 years old and shortly away from his retirement—had 40-plus years in business, been in the same town, worked with the same general contractors and project manager, and developed a great company. His business grew from $3 million to $10 million, and he went from several dozen employees to over 100.

This contractor did projects that were a few $100,000, up to a couple of million dollars. Then, one week, one of those projects had a little bit of a delay, nothing problematic, nothing different than folks see in a typical construction world. And it was going to be tight for payroll. So, what did he do? This business owner got a merchant cash advance.

He was offered a couple of hundred thousand dollars within a day was deposited into his account shortly after that. He had multiple hundreds of thousands of dollars going through his account, and he’d been in business for years and had a great relationship with his bank. It was easy to lend him money. He said, “Oh, my payroll is only $60,000 or $70,000 per period, but it is always good to have a little extra money.”

MCAs: Too Good to Be True

So, the contractor took the loan, and he started to repay that every day. The first and second months weren’t an issue, but suddenly, the amount of cash flow debited from his account over those two months strained his cash because contractors only get paid once a month.

Typically, contractors are paid that month for what they did and the costs they incurred 45 or 60 days ago. These payments are not in line with their current payroll or overhead. So, contractors are left floating payroll and expenses to material suppliers for six to eight weeks. These contractors must also have money left over to repay their MCA loan.

If businesses earn money out of sequence with an MCA’s repayment structure, they will have cash flow problems. This kink in cash flow will cause the business owner more stress than just missing payroll one week or having a challenging conversation with a material supplier, vendor, or employee.

This solution may sound like the worst-case scenario, but it’s not as bad as what happens two and a half months after getting an MCA loan.

Robbing Peter to Pay Paul, Except Peter Is Broke, Too

The contractor had the same payroll problems but now had two months’ worth of accounts payable issues too. He didn’t pay materials suppliers, and the vendors shut him off on the jobs. The suppliers were not going to be without payment, and they weren’t going to deliver.

Because the suppliers and vendors ultimately put liens on the project, the contractor had general contractors and their project managers calling him, wondering about the suppliers’ payments. The project managers also held back paying any money they owed the contractor for previous months’ invoices because of the liens placed on the project.

To add insult to injury, the merchant cash advances lenders are calling this contractor too, but this time, they’re not calling him and offering more money. They’re calling him because their daily debits are starting to bounce, and they’re getting frustrated and making threats. In addition, they are also calling the Project Managers and telling them to freeze payment because they are entitled to the money owed to the contractor.

Now, this contractor is in a world of hurt, and instead of just missing payroll, his whole business is now at risk. This financial crisis could have been mitigated if he had been educated on the dangers of MCA loans.

The Fast and Easy Path Is Usually the Wrong Way

The MCA lenders led the contractor down a path without giving them all the information—but it is up to businesses to stay informed.

Merchant Cash Advance loans are not smart solutions for construction companies. If a business is working with people who have the borrower’s best interests at heart, they will ask tough questions.

Then after careful deliberation, they will use this information to help assess the business so they can appropriately give it something beneficial to the company’s future. If receiving $100,000 feels too easy, be cautious. There are always strings attached. These strings just happen to appear a few days, weeks, or even months later.

At Mobilization Funding, we’re here to help you make better construction business decisions. Let’s chat about your options — (813) 712-3073