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.

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 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.

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 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.

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 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

Construction payments are notoriously slow. There are a lot of misperceptions about why that is. Raise your hand if either of these statements sounds familiar.

“General contractors NEVER pay on time.”

“Subcontractors are terrible with money.”

Of course you have; they are two of the most common complaints made in the construction industry. The trouble is that both of these statements over-simplify a complex issue and pin blame where it doesn’t really belong.

Why are subcontractors always chasing down payments? Why can’t GCs ever seem to pay on time?

Slow payments, of course.

Getting paid in construction is like trying to run a marathon where the road is pocked with potholes and carpeted in broken glass. It is an arduous, uncertain journey that starts at the bid and ends . . . whenever (if ever) the subcontractors finally get paid. And retainage—that’s a whole other conversation!

Our industry is just starting to talk about slow payments. It’s about time. If we can change the conversation from the cliched stereotypes about irresponsible Subcontractors and miserly General Contractors, we can instead focus on solving the actual problem.

The Reality Behind Slow Payments in Construction

It’s no secret that construction has the slowest payment timelines of any industry. Levelset’s 2019 National Construction Payments Report detailed that about half of all US contractors do not get paid on time, with a staggering average wait of 83 days. The majority of those are subcontractors, who already operate on extremely tight profit margins. They also finance the bulk of the expenses in the early stages of a project.

On the flip side, the same report showed that most general contractors are paying their subs before they get paid by the owner. General contractors are putting their own business’s profitability at risk to cover payments to subs and suppliers because they aren’t paid on time, either.

A late payment doesn’t only impact one project. One late payment on a project can be the rolling stone that starts an avalanche — especially for subcontractors. Subcontractors often rely on the payment from job X to cover the mobilization costs on new project Y. If that money doesn’t show up, they scramble to find a funding solution. The results are often ugly. Desperate subcontractors grab quick cash from Merchant Cash Advances that end up bankrupting their business and ruining their lives.

Sound far-fetched? The 2018 Bloomberg series, Sign Here to Lose Everything, tells the story of Jerry Bush, a plumbing contractor who attempted suicide after MCA debt crushed his business. One of the lenders told Bush he would pursue him “until his death.”

Slow payments is a serious problem, impacting everyone in the industry. This is the battle cry our industry needs: We have to attack this together. We CAN solve it together. It will take technological advancements in construction finance, operational shifts within contractor companies, and collaboration between General Contractors and subcontractors. That’s right; you guys and gals need to get comfortable talking about cash flow on the project.

But first, let’s look at some of the ways technology is making it easier to get paid.

Getting Paid is Easier Online

The trouble with payment in construction starts with the process to simply request a payment. It’s a marathon of paperwork for the subcontractor, and that is only the first step. The financing on almost any construction job is like a precariously built Jenga tower of invested parties — including the General Contractor, developer, owner(s), lenders, and so on. A mistake in the paperwork chain at any point and the whole thing comes tumbling down.

The process is confusing, prone to failure, and entirely inefficient. Thankfully, there’s hope on the horizon.

Like many industries before ours, the digital transformation is solving some of these challenges. Levelset made waves when it secured $30 million in funding for its cloud-based SaaS company that allows contractors to quickly send a payment app or file a Mechanic’s Lien. On the financing side, Rabbet has created a streamlined, AI-driven construction draw process that makes it easier for lenders to receive, review and approve payments. We’ve undergone our own digital transformation at Mobilization Funding. We utilize digital solutions to make applying for funding, requesting disbursements, and making payments faster and more efficient.

But, technology hasn’t yet solved the subcontractor’s main dilemma. How do I finance 3 months of labor, equipment and materials on this job without a single payment from the job?

That’s where a good old-fashioned conversation can help.

Tear Down the Stereotypes

Before subcontractors and GCs can start talking about money, both sides need to adjust their perceptions of each other.

General Contractors — subs aren’t necessarily bad with money.

Subcontractors — the GC isn’t sitting on a stash of cash and delaying your payment out of malice or neglect.

Both of you were hired to do a job. Both of you are trying to do that job to the best of your team’s ability. Both of you are dealing with the constraints of the construction project, and You BOTH want to SUCCEED. So rather than butting heads over a situation neither of you is responsible for, why not work together?

Acknowledge Reality from the Start

Why wait until the first late payment to talk about what to do next? Subcontractors need to start talking about funding and payments in the bidding stage. Include late payment penalties (and early payment incentives) in your bidding contracts. When estimating your project costs, remember to include the cost of your funding. Because let’s be honest — you have to get funding from somewhere to float three months’ worth of labor, materials, equipment, and so on. Small Business Loan, Line of Credit, Mobilization Loan, “borrow” it from another project, MCA — Just kidding, please don’t take an MCA ever again — there is an associated cost. If you don’t build it into the bid in advance or you didn’t build it in at all, it will come out of your profit margin and you just might end doing the project for no profit at all.  In the case where you take out an MCA you most likely are doing the job to just give all your profit to the MCA lender in addition to ruining your company’s cash flow.

Create a Plan Together

General Contractors and Subcontractors need to sit at the table, put the numbers between them, and figure out how to complete the work at a profit margin that keeps both businesses growing and flourishing. Stop seeing each other as Customer/Vendor and start treating each other as what you really are: Partners.

You have a shared goal, remember: a successful project completed at a profit.

Talk honestly about contingency plans, incentive deals you can kick up to the owner, and discounts or credits you can leverage with suppliers. Build a strategy that reduces tension around money, ramps up collaborative success, and allows you both to focus on the performance of the project.

It is a long road ahead of us to solve the slow payment crisis in construction. It’s a marathon, but it doesn’t have to be hell on Earth. The first step is communication.

Now, go get paid.

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Contract financing is a way for businesses that operate through contracted work to secure funds in advance of the work being performed. If you’ve ever turned down work because you didn’t have the cash flow for the initial labor, materials, or other costs associated with the project, contract financing might be the financial solution for you.

What is contract financing?

Contract financing alleviates the cash flow gap that occurs when you have expenses related to a new project contract, but will not be paid by your customer until after the work is underway or completed. The financing is a loan collateralized by your contract. Contract financing differs from invoice factoring in that the advanced funds are available before you send an invoice.  Also, you still own your receivable.

Funding limits vary, but typically a contract financing firm will lend up to 20% of the contract value. (That is Mobilization Funding’s funding cap on contract-backed loans, as well.)

Who does it help?

Contract financing works best for businesses that have a solid performance history and are growing faster than their free cash flow can accommodate. These businesses usually have their operational cash flow management under control, and may even have other forms of funding available such as SBA loans or credit lines from their bank. However, contract financing allows them to grow securely by accepting large contracts without straining their cash flow or drying up their other funding options, which are better utilized elsewhere.

For example, let’s assume Lightning Man Inc. is an electrical contractor in Tampa, Florida, owned by Joe Mitchell. The company has an annual revenue of about $2 million, and is in a phase of rapid growth. They’ve just been awarded a $1.8 million contract with a GC. The work includes all electrical systems in a new corporate campus park. The contract is Paid When Paid, with monthly billing at the end  of every month. Joe knows he’ll have at least three payroll periods for his crew, not to mention supplies and materials expenses, before he’ll even submit his first pay app.

A contract-backed loan allows Joe to cover those expenses without dipping into the cash flow for his other projects or the operating cash he needs to pay for his overhead expenses. It also means he can save his bank line of credit for other organizational costs associated with Lightning Man’s growth.

Contract financing isn’t only for construction contractors. If you earn revenue through contract work, and you could use funds to cover the initial costs of that work, contract financing may be a viable funding solution for you.

How does contract financing work?

Let’s stay with our friend Joe aka “the Lightning Man” for a bit longer. Joe knows he needs payroll money before he sends an invoice, so invoice factoring can’t help him here. He calls Mobilization Funding — we’ll use ourselves as an example to keep things easy — and asks about contract financing.

After a quick preliminary chat, one of our team members tells Joe, “It sounds like you’re a perfect fit. You have a great work history, this work is right in your wheelhouse, and your business sounds solid. I’ll send you a follow-up email with our next steps.”

Here’s what a contract financing company typically asks for:

  • A complete loan application
  • Owner identification
  • Copy of the contract for the project
  • Company financial documents such as bank statements, tax returns, income statement, balance sheet, and an accounts receivable report

With the copy of the contract, Joe and our Project Funding Manager sit down to create a Cash Flow Schedule. (We have a sample Cash Flow Worksheet available on our site. Click here to access it.)  This shows Joe when his project will have cash flow gaps that our loan can cover, and when the project will be self-funding. We align our repayment schedule to when Joe’s customer will be paying him, so that he doesn’t have to use his organizational cash flow to pay us back.

The loan documents are executed, and a bank account under the name and Tax ID of Lightning Man Inc. is opened for the funding. Since the loan is based on the contract, it is imperative to the lender that all funds for this job stay on the job. Through the execution of a funds directive, all monies associated with the project come through this bank account.

In the end, we loan Joe $200,000 for labor and sub-labor on the project. He pays us back in installments as he receives payment from the general contractor. Joe is able to start the job with the right amount of labor and all the materials he needs, which actually ends up saving him money through his team’s efficiency. He completes the project and earns a healthy margin. Best of all, the GC appreciated Joe’s ability to expedite his work and stay ahead of schedule. Lightning Man Inc. has a new and important ally in its quest for growth.

When your business has the cash to start new work without sacrificing other projects, or cash that can be used for other business expenses, your team can get to work with total confidence and YOU can focus on your real job — growing your business.

Read Next

Cash Flow 101

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Construction contract financing for subcontractors solves one of the biggest challenges subcontractors face when they are awarded a new project—financing the upfront costs associated with the work. Materials, equipment, bonding premiums, supplies, and of course labor are all expense types typically incurred before you, the subcontractor, ever invoices your general contractor, let alone sees a payment. More than just a problem-solver, when used strategically a subcontractor can use contract financing as part of their strategy to win more bids and grow their business.

How does Construction Contract Financing Work?

Most forms of financing available to subcontractors relies on proof of work performed. Contract financing is unique in that it uses your contract, not your invoice, as collateral. The lender (hopefully us!) will assess the value of your contract and your ability to perform the work. The value of the contract is the collateral itself, and the loan amount is based on a percentage of that contract value. This option gives you the cash you need to start a job in the most efficient way possible. You can start with and put the right size labor force on the job when you want, order and stage materials in advance, and build efficiencies into the schedule.

Combine the power of construction contract financing with a cash flow projection tool (you can get ours for free by clicking the link below) and you can actually solve your own cash flow shortages AND potential delays in the schedule for your general contractor.

Download Our Cash Flow Tracker Tool
(Don’t forget to get the instructions,too)

What You Should Know About Construction Contract Financing

Contract financing depends on the subcontractor having a signed contract with a general contractor, property owner, or other party. The contract should layout the job requirements, payment schedule, scope of work, and the total value of the contract.

In addition to reviewing the contract, the lender will need to evaluate your ability to perform the work specified in the contract. For example, we look at the type of work being contracted and compare it to work that company has performed in the past. If the project falls within the normal project specs of your company, great! If the project is bigger or more complex than your previous work, what is your plan to execute it? A bigger project isn’t a bad thing — it’s actually great and a sign that you are growing — but your lender needs to be confident that you can perform the work and get paid by your customer. Finally, your company’s financial health will get a quick check-up. The contract is the collateral for the loan, but it isn’t a lifesaver for your entire business. A lender will want to ensure that the rest of your company will be able to operate throughout the loan’s lifetime.

Another important aspect of a construction contract loan is that the cash from the loan is used for project-related costs for that job. The money can only be used for project costs such as materials, supplies, bond premiums, or labor. This ensures the project moves forward, the subcontractor invoices for the work completed, and ultimately the subcontractor (and the lender) gets paid. Imagine doing the extra jobs you want to do or have passed up previously due to cash flow concerns without putting any stress on your existing business. That is what a construction contract loan does for you.

We accomplish this through what is called a “funds directive.” This is the same document a bonding company would use when they approve a bond for a project and have a funds directive stipulation; it is an accepted form in the construction world we all live in. We set up a project-specific bank account in our clients’ business name and their tax ID, and direct all project-related funds in and out of that account including the funds from the loan that are available to use before ever invoicing the project. Need to pay a supplier for materials? It would come out of the project account. Weekly payroll for the project? All comes out of the project account. General contractor ready to pay your first invoice? It goes into the project account. When it comes time for our repayment, that also comes out of the project account and is in line with when you are paid from the project so you don’t have to stress the cash flow of your normal operating business.

How Contract Financing Can Help You Win More Bids

How does a construction contract loan help you win more bids? It depends on your lender. When you work with a lender like us, you get much more than just a loan. You get a financial partner who will help you estimate and plan the project’s cash flow before the work starts.

We sit down with every client to determine what their markup or margin on the project really needs to be. What is your company’s overhead? What is the retainage on this project? What expenses do you expect to incur as part of the project? Having REAL numbers and a breakdown of estimated cashflow for the project signals to the General Contractor that you have done your homework and know what it takes to get the job done right.

You can also ask your lender for a financial capability letter, which shows the GC that you have the capital to perform the job and that the funds will be used exclusively for this project. A financial capability letter is especially important when bidding on government projects.

Construction Contract Financing Helps Subcontractors Succeed

We know that commercial construction contractors can succeed at their highest level of performance when they have the funds to hire the right amount of labor, equipment, and purchase the materials needed for the job. You don’t have to take our word for it! Our customer Andrew Ammons shares how he was able to save time and increase his profit margin with a construction contract loan.

With construction contract financing in place, subcontractors can stop worrying about start-up costs and confidently dedicate 100% of their energy and focus to the task at hand: safely and successfully completing a project on-time and on-budget.

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Cash flow management is particularly critical for small and mid-size businesses, as these companies often have less free cash flow to help them cover unexpected costs, delays, work shortages, or their growth.

Before we talk about good cash flow management and share a few tips to improve cash flow at your business, let’s back up a bit. What is cash flow, and why is it so important?

What is Cash Flow?

If you’re not entirely sure what we mean when we say “cash flow,” don’t worry—you’re not alone. Cash flow is simply the money coming in and out of your business. A positive cash flow means you can pay all of your company’s overhead costs, debt payments, and other expenses, still have some money left over in the bank account and hopefully provide a buffer against any future issues or challenges. If you have positive cash flow, you can reinvest in your business, take advantage of growth opportunities, and weather financial downturns with less stress.

Cash flow comes in three forms: operating, investing, and financing. We’ll focus on operating cash flow, which is the money your business makes from selling goods or services. Basically, the money your company makes doing whatever it is your company does. Financial cash flow shows the money you use to fund your business, including debt, equity, and dividends. Investing cash flow is money created from investment opportunities.

How Does Cash Flow Management Affect My Business?

Here’s an easy question: Do you know how much cash you have in your business each and every day, what the expenses of the business are that week and how much cash you need in order to manage the week’s needs?  If you answered NO to all or any part of that then this is especially for you! (Checking your bank account at any given moment to determine how much cash is there is NOT sufficient to give a Yes to this question.) A report given to you weekly or daily as the business owner is key to your cash flow management success.

Managing your cash flow sources and the consequent uses of that cash can literally make or break your business. A U.S. Bank study showed that 82 percent of small businesses fail because of poor cash flow management. We cannot over-emphasize the importance of being able to estimate, track, and forecast the money coming in and out of your business, especially if you are planning to grow.

Prolonged cash flow shortages can lead to insurmountable debt, while short but chronic shortages can lead to stricter payment terms with vendors and lenders, who know longer trust your ability to pay. It can also impact your company’s credit score, which means banks will be less likely to lend to you when you need funds to grow … or survive.

Cash Flow Management Tips for Small Businesses

Hire an accountant and likely a bookkeeper too. If this is the only thing you take away from this article, it would still be a valuable read. Hiring an accountant is THAT important to your business. Don’t rely on Quickbooks or your friend’s mother-in-law, unless she is a CPA. You need a trusted professional who can help you navigate your cash flow statements, ensure you maximize your cash flow, and help you craft your business growth strategy.  If you are saying to yourself, “I can’t spend the money on an accountant or they are too expensive” then you either need a new accountant because the one you have is not helping you, or you are being penny wise and pound foolish.

Know your numbers. The first step toward better cash flow management is to know your numbers so you can perform a cash flow analysis. “Know your numbers” may sound cliché, but it is so critical to your success or failure. You have to know what costs you have in your business—the fixed costs (salaries, rent, debt service, insurance, vehicle payments, etc.) and the variable costs associated to your products or services.

If you use an accounting software—or even better, if you work with a CPA like we mentioned above—you should be able to get an accurate breakdown of your cash flow sources and uses in a cash flow statement.

We all go into business for a completely different reason than “know your numbers” but that does not mean we get to ignore them.  If you do your business will most likely fail despite your best intentions.

Estimate, track, and forecast. By looking at a cash flow statement, you can see if you are accurately marking up your products or services to cover the overhead expenses of running your business. Here’s how you determine the accurate markup:

  • Add the fixed cost of all recurring monthly expenses to get the total monthly cost. Multiply by 12 to get the Total Annual Expense of those fixed costs.
  • Determine what the estimated Total Annual Revenues will be for the year.
  • Divide the Total Annual Expenses by the Total Annual Revenues to get a percentage.
  • That percentage is how much of each dollar you sell will need to go toward paying your fixed overhead expenses. If you add that percentage to every product, project, or bid you will break even and have no profit at the end of the year. What amount or percentage you add above that is what your profit will be.

The next step is to track your cash flow. This is especially true in businesses where costs can change. We specialize in working with construction and manufacturing companies, and their project costs can shift quickly and often. The same could be true for a restaurant, if the prices of ingredients suddenly skyrocket due to a shortage. Tracking your cash flow on a daily, weekly or monthly basis (depending on the nature of cash flow in your company) helps you stay ahead of any potential cash flow issues.

Download our free Cash Flow Tracker Tool.

Make sure to get the Cash Flow Tracker Instructions too

Finally, when you have a history of cash flow tracking and analyses under your belt, you can start to forecast or predict your cash flow, which is the key to making an effective cash flow plan for growth. You now have the ability to run your business and make good decisions in the moment but also proactively.  Decisions like when to buy new equipment, bulk order supplies when there is a good deal, take an owner’s distribution, hire a new employee, give bonuses, etc.

Have an emergency fund. Free cash flow is cash that you do not have to spend on overhead and that you could re-invest into the business. This is the ultimate indicator of financial health. Most accounting professionals recommend you keep three to six months of working capital in reserve. If this seems daunting, start small. Sit down with your cash flow analysis and determine what percentage of your cash can be saved. Then continue to save that percentage even as you grow.

Negotiate terms with suppliers. If you need something, you NEED to ASK for it. Remember that the customer/supplier relationship works both ways. You need their products; they need you to stay in business and keep paying them for product. If you need credit or extended payment terms, you need to ask for it. Get them invested in your success by sharing how the new terms will help you grow and order even more.

Get paid on time. The best way to avoid a cash flow shortage is to get paid when you expected to. In construction, the wait to get paid is often 60 days or more. One easy way to keep cash flowing in is to create a process around submitting invoices so that they are correct and on-time. It can also be helpful to setup reminder emails to clients if you have extended terms of payment.

Why Do I Need a Cash Flow Plan for Growth?

Growth phases are one of the most exciting but also most vulnerable times in a company’s life. Having a cash flow forecast built on solid cash flow tracking will help you determine how much extra you need in order to meet your growth goals. If you plan to grow by 25% next year, a cash flow plan will help you break down what that growth will do to your overhead and other expenses, and how much of your free cash flow can be utilized to cover the cost of growth.

There’s nothing wrong with taking out a loan to grow, but it should be part of a comprehensive financial plan that supports your growth without accumulating too much debt or the wrong kind of debt.

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Construction Management Solutions to Streamline Your Cash Flow