We talk about merchant cash advances a lot. Our clients do too, because so many of them have been burned by these not-quite-a-loan financial products. Taking out a merchant cash advance when your cash flow is pinched can be the “help” that ultimately bankrupts your business. That’s not an exaggeration; there are plenty of MCA horror stories on the Internet, and we hear them everyday from prospective clients looking for a way out.

When someone who has been burned by a merchant cash advance before comes to Mobilization Funding, one of their first questions is, “How are you different?” We are happy to share exactly how we compare with “quick cash” MCAs.

Lender Versus Broker

In most instances, you don’t purchase your MCA from the lending company. You get it from a broker. This is the guy or gal who calls your business promising “quick, easy cash.”

When a broker sells an MCA they add their own markup to the deal, as much as 10% of the loan’s value. That commission becomes part of the total cost of your loan, which, in a way, means YOU pay the broker for the service of delivering you to the MCA company.

We don’t use brokers. We have strategic partners—people and companies who align with our purpose and values. When a referring strategic partner, like a factoring company, brings a client to us, we don’t tack a commission for the referring company on to YOUR loan. We send them a referral fee and a thank you, because that’s how we believe business should be done.

Basis of Funding

Merchant cash advances are basically an advance on future sales or receivables. The funding you receive is based on the average amount of cash flowing through your business’ bank account on a monthly basis (and your credit score — we’ll talk about that in a minute).

The trouble with the MCA’s basis of funding comes when a majority of the cash that comes into the business isn’t profit. If you are a commercial roofer, and your monthly cash flow shows $250,000, but you pay $100,000 to suppliers and vendors, and another $75,000 in payroll, guess what? The MCA company only cares about that first number.

We base our loan on your contract or purchase order. We sit down with every prospective client to map out the weekly cash flow of the project and review their expected margin. It’s important to us that (1) the work gets done, (2) our client succeeds and builds on that success, (3) we get repaid.

By putting people and performance over profit, we can protect our business AND our clients. That’s something merchant cash advance lenders just can’t say.

Personal Credit

We don’t check your personal credit. Merchant cash advances do; they have to, because they base their approval on it and if your business defaults, they want to be able to come after your personal finances as well.

Worse, if a broker is shopping your advance around to several lenders, they can each run your personal credit report. The inquiries alone can negatively impact your credit score.

Cost of Funds

Merchant cash advances do not have “interest” rates. Instead, they have a “factor rate” applied to the loan. The factor rate is a percentage of the borrowed amount, and the percentages vary widely from high single digits to as much as 50 percent or more. That is why a $200,000 merchant cash advance on average is almost three times the cost of a Mobilization Funding loan.

Repayment Structure

Look at that chart again. Merchant cash advances are almost always sold with a daily or weekly debit from your account. That debit typically starts right after funding is received (the next day or possible the next week). A daily debit from your account might be fine if you are a popular restaurant or retailer, but it is almost always a problem for construction and manufacturing companies. Your cash flow cycles simply do not support a daily debit and likely even a weekly debit.

In construction and manufacturing, businesses wait to be paid between 30 and 90 days after they submit an invoice or pay application to their customer, typically at least 30 days after some portion of the work has been completed. That means contractors and manufacturers are perpetually in need of cash to mobilize on each new project, but won’t be paid for the work for at least 60 days. That is not a cash flow cycle that can support a daily, or even weekly, draw on your bank account.

Our CEO Scott Peper puts it like this, “If you have money coming in daily, you may be able to handle a daily debit. If you don’t, you can’t.”

MCAs are based on future sales at a pre-determined factor rate, so it’s actually more expensive as it relates to an annualized interest rate to pay them off early and no benefit to you. (It is possible, but very rare, to find an MCA that offers a lower rate for paying it off early.)

Merchant Cash Advance or Mobilization Loan?

The answer is clear.

We put a purpose behind our business, “to help those we come in contact with.” If our loans aren’t the solution to your needs, we will help you find the right loan provider. If you have questions about how our loan works, we will answer them openly and honestly. (We have several videos on our YouTube channel addressing common questions about our loan program.)

It is our goal to arm you and every member of our community with the information you need to make smart, strategic decisions. When it comes to merchant cash advances, the smart decision is to avoid them at all costs.

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Construction funding for contractors helps cover the costs of payroll, materials, insurance and more before the project begins. Many subcontractors, and GCs who self-perform, are caught in a cycle of robbing the cash from one job to get started on the next. Why? It is NOT because most contractors are bad with money. They are not. It is because the majority of costs associated with starting new work have to be paid, weeks or even months before the first pay app is issued. Construction financing for commercial contractors alleviates this burden by providing the capital contractors need when they need it most — at the start of the project.

Types of Construction Financing for Contractors

Not all construction funding solutions are the same, and your choice can make a HUGE difference in the success — and the ultimate profit margin — of a new project.

We’ve written previously about many of the lending products available to contractors. Invoice factoring and Asset-Based Lending, for example, are common in the industry, but since they do not provide funds before an invoice is generated, we will not cover them specifically in this article. You can read more about invoice factoring and ABL credit here.

Merchant Cash Advances

Let’s get this monster out of the way first. Merchant Cash Advances are, unfortunately, a very common method for contractors to get the capital needed to start a job. The money is quick and feels easy to get, which should be your first warning.  If a lender or broker really understood construction they would not recommend a loan product that has daily or weekly payments to a company that collects money once per month.

MCAs are BAD for construction contractor companies. Even just one small MCA can spiral into a whirlpool of debt that drowns you and your company. Before you take an MCA, we invite you to read our guide: The Real Cost of a Merchant Cash Advance.

Personal Financing

Contractors who cannot secure traditional bank funding but have personal assets such as home equity, personal savings, or retirement funds, may choose to dip into these to cover the upfront costs of a new project.

This strategy works, but it carries a tremendous personal risk. The construction industry is infamous for delayed schedules and slow payments. Be careful when putting your home or retirement fund up as collateral for your business project needs.  In construction, a job can go bad through no fault of your own, or because a General Contractor or owner takes 90 days to pay an invoice.

Available Cash

Cash flow in construction is complex; every project has associated costs and an expected profit. In order to keep your company cash flow positive and growing, it is important to treat available cash not as a first resource, but as a last one. Keep a good reserve of cash on hand for emergencies, and leverage other funding options to mobilize on new work that will ultimately result in even more cash on hand.

Bank Lines of Credit

This is the gold standard for working capital lending. The funds in your LOC can be used for anything, including financing the upfront expenses on a new job. Similar to cash, though, it is important to use your LOC to drive business and fund monthly operations while saving some availability for more critical needs should they ever arise. It is also important to pay the LOC back when you receive the cash back each month – banks like and need to see the money used this way.

Materials Funding

There are alternative lenders who specialize in providing funds for construction materials. Typically, this type of funding is not a loan, but an agreement between the contractor, the supplier, and the third-party lender. The lender pays the supplier directly and the contractor pays back the loaned amount after a certain time period.

Payroll Funding

Meeting payroll needs is one of the biggest challenges for construction companies, especially on a new project. The demand for labor is highest at the start of the project, but the cash from the job won’t come for at least 30 days after you submit an invoice.

Payroll financing is a type of invoice factoring, where you agree to sell your AR to the funding company. In return, they provide up to 90% of the AR value in the form of a loan for payroll.

Contract Financing

We believe that commercial construction contractors can succeed at their highest level of performance when they have the funds to hire the right amount of labor, supplies, and materials needed for the job. When contractors have PEACE OF MIND that the costs of insurance, permits, and bonding are covered too, they can dedicate 100% of their energy and focus to the task at hand: safely and successfully completing a project on-time and on-budget.

That is the goal with every loan we make. Here is how we do it:

Our short-term construction funding loans are tied to the specific project. The money can only be used for project costs — materials, supplies, labor, bond premiums, etc. The repayment plan is aligned to your pay apps, which reduces the overall strain on cash for the business and relieves the stress associated with how you are going to pay for the project related costs. The repayment of the loan is in line with when you are paid for the project so you can pay off the loan as you earn the money.

Are we the only game in town when it comes to commercial construction contract financing? No, but we are confident that we are the best option. Let us prove it to you.

Every new project is an opportunity to build your reputation and grow your business. Don’t let the upfront costs of new work keep you from realizing your true potential. Call us today at 813-712-3073 to discuss your construction financing options.

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Why the Commercial Construction Industry Benefits from Alternatives to Traditional Lending

In construction finance, many lenders (ourselves included) utilize some type of risk mitigation in order to ensure that the project goes well and that the money lent is protected and will be repaid. Construction, in general, has risks that all parties in the construction process must account for in order to do their jobs properly and achieve the desired outcome. Whether it is a bank lending money to a developer/owner, a government entity spending the tax dollars they collect from their citizens, or a bank lending to a specific company in the construction process (GC or Subcontractor), they all want the project to go well so they can be repaid. The lender you choose — and who you are in the construction process — matters a lot. Each company in the construction process plays a different role and therefore has different risks, needs, and concerns they must manage. The lender for the developer or owner has a different set of circumstances than the lender for the GC, and the lender for the subcontractor has different circumstances than either of the former.

We administer a “funds control approach,” when we make a loan to one of our customers. This means we use a separate and specific “disbursement account” to make sure the money on the project stays on the project, including the proceeds of the loan to our customer. Because the cash from our construction finance loan is provided when the project starts, and before any work is completed and invoiced, it is important to make sure that the money is used for project related expenses. For our customers, the account is in their business’ name, and is used exclusively for disbursements of and payments associated with the project we are funding. Need to pay this week’s payroll on the project? It comes out of the disbursement account. General Contractor sending you a check for work completed? It goes into that same disbursement account.

A funds control approach protects you and the project you are working on, yet many new clients are nervous about it for one simple reason: They don’t want to tell their GC they have a financial partner, even though everyone else in the construction process has one.

We get it. Talking about money on a project can be awkward, stressful, and frustrating. But, it doesn’t have to be.

Be Confident

General Contractors KNOW the truth — that no subcontractor can finance 60-90 days’ worth of work at the beginning of a project without outside funding. We’re talking about hundreds of thousands of dollars for payroll, equipment, insurance, materials, and more, all coming out of the subcontractor’s bank account and with no expectation of making it back for two to three months when work is completed, invoiced and then paid!

In the past, a subcontractor might have had funds from the contract in advance of the project starting or the customer’s bank would often provide the upfront funds a subcontractor needed. That all changed with the Great Recession. So, if funds used to be advanced or provided and now are not, why wouldn’t a subcontractor need and seek out a lender now?

Approach the conversation with confidence. This is business as usual. A construction finance partner is what allows you to execute and perform, which is what the GC cares about most.

Is your company on track to meet your goals for growth? Get “built for growth” with our free strategy. Click here to get the Built for Growth Checklist.

Acknowledge the GC’s Perspective

Just like you, General Contractors must protect their business, the project, and their customer (i.e. mitigate risk). Chances are they have been burned before by subcontractors with bad, or just the wrong, financial partners. When a subcontractor goes under because of crippling Merchant Cash Advance (MCA) daily debit loans, it is the GC who must fill the void. When work slows down because a subcontractor can’t order materials because of bad credit, the GC is the one who has to solve that problem and manage it with their customer.

The best thing you can do is acknowledge their fears and then lay them to rest.

Be Transparent

Reassure your General Contractor by explaining who your financial partner is — their credentials, experience, and how their construction finance program works. (If that information doesn’t help your case, you may want to consider a new finance partner in the future.)

Our clients can tell their GCs that our loan is, “ … only for use on this project and can ONLY be used by us to purchase materials, equipment, and to fund the labor needed. This ensures we can get the labor and material needed to maintain our schedule and protect you and the project overall.”

Once you and the GC are on the same page regarding the need for a finance partner, give them their call-to-action. What do they need to do in order to make this work?

Typically, it means payment must be made — check mailed or deposited via wire or ACH — to the specific, funds-control disbursement account. Be sure to tell the GC, “You are still paying ME directly, not a third party and you are not changing your contract with me.”

Frame the Conversation

Framing the conversation is a great way to let your General Contractor feel positively about your finance partner right from the start. Framing a conversation is simple and can be incredibly effective when done right.

Start by thanking them for the opportunity to perform for them. Remind them that they hired you for a reason beyond price.

Then, name the reaction you want them to have. “You will be relieved/excited/happy” are all good examples. When you tell the listener what reaction you expect, they are more likely to receive the message in a way that elicits that response.

The key part of this is you MUST believe it to be a good solution too. It must be a genuine feeling.

Your final message might sound something like this:

“Hi, [GC Name]. Thank you again for the opportunity to work on [Project Name]. My team is excited to get to work, and you will be happy to hear we have lined up the funding needed to get started. Our financial partner, [Financial Partner Name], allows me as a business owner to meet the performance obligations and schedule this project demands and do our best work for you!

[Financial Partner Name] administers a funds control approach to the project. They manage an account exclusively for disbursement of funds during the project. The capital in the account is for use on this project ONLY and is reserved for project-related uses such as purchasing materials, renting equipment, and to fund the labor needed.

[Financial Partner Name] is aligned with our project’s success. This is the secret to how my company is able to perform and succeed.

What does this mean for you? It means you don’t have to worry about stopped work or delays due to cash flow problems and you can rest assured I will get the project done. After all, we know that the great majority of problems on a construction project are due to a lack of cash. I don’t have that problem and it is because of my finance partner relationship.

The only action you need to take is to mail or wire our payments to [Details of Funds Controlled Account]. Don’t worry — the checks are written out to me. I am not selling my invoices and you are not paying a 3^rd party. The checks simply have to go to this address.

Thanks again. Let’s get to work!”

You can see how the message above thanks the GC, names the emotion, and reminds the GC why a financial partner is needed — so you can do your “best work!”

Construction Finance Takes Teamwork

Like everything else in construction, it takes teamwork to finance a project. When you introduce your financial partner as another key member in the project’s success, your GC can view them as an ally rather than a headache.

And if you continue to perform, meet deadlines, and exceed expectations, then your ability to secure funding can raise your reputation as a dependable business partner and help you win even more business. Now that’s teamwork.

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Our CEO Scott Peper recently joined the good folks at Levelset for a webinar on construction financing and how your funding choice could impact your ability to get paid. If you missed the webinar, you can catch a recording here.

We have already listed out the many types of construction financing available to contractors — the good, the bad, and the ugly. Let’s dig into how each of them can help, or harm, your ability to grow your business.

Bank Line of Credit

This is the gold standard in lending. If you have a bank line of credit, your company has solid financials and a proven track record of performance. You can use the money for anything, including financing the upfront expenses on a new job. The downside is this: The size of your Line of Credit is determined by your past 24 months financial performance, not the next 24 months.

If you are growing fast, you may outgrow your line of credit.

SBA Loan

These are often easier to acquire than a bank line of credit, IF you qualify as a small business. For commercial construction, the SBA defines a small business as one with no more than $39.5 million in average receipts. SBA loans require a LOT of documentation, and you need to find the right sponsor (i.e bank) to make it happen. The biggest downside in terms of growth is that once you hit the cap, you no longer qualify.

***Important to Know*** Not all SBA loans, or banks that provide them, are the same!  Finding the right bank to sponsor your SBA loan is very important and how they present your business is critical as well as how you present to them. The bank is still taking a risk on your SBA loan and their assessment of your business and the perceived credit risk is just as critical to the approval process.

Invoice Factoring

While invoice factoring shrinks the time between when you invoice and when you get paid, it doesn’t get you funding before the work starts. And while financing your company between payments is absolutely a normal part of the construction industry, many General Contractors have a negative perception of factoring.

Hesitant to talk to your GC about payment and financing? Read this blog next: Why Subcontractors Need to Talk About Slow Payments with General Contractors.

Invoice factoring CAN help you grow. Done right, it can balance out your unpredictable cash flow, which gives you a chance to fund more strategic growth initiatives.

Asset-Based Lines of Credit

Like invoice factoring, an ABL line of credit can regulate cash flow by speeding up the time between invoice and payment. This allows you to have more cash in hand to invest in growth opportunities.

For both invoice factoring and ABL credit, you need to make sure you aren’t paying for future growth with money you need for present demands. This is one reason we recommend setting up  a dedicated payroll checking account, keeping your Operations account for just operations of the business.

Merchant Cash Advances

These have nearly ZERO benefit to construction contractor’s plans for growth. In fact, these high-risk cash advances can destroy your ability to get paid for the job you’re on now and crush any dreams of future growth.

Don’t believe us? Here’s a quick story: A commercial glazier in Texas had a healthy balance sheet and a line of credit at his local bank.  The line of credit had been in place for years, and was a little too small, but they were making due and all signs pointed to continued success.

Until there was a delay on a project, which resulted in a cash shortage. The owner needed to make payroll, so he found a quick and “easy” solution — a Merchant Cash Advance. And when he couldn’t keep up with the daily payments, he got another.

He almost went bankrupt. He almost lost everything.

Merchant cash advances don’t work for construction companies. Need more proof, read this next: The Guide to Merchant Cash Advances.

Mobilization Funding

Our construction financing program is built to help you grow. You can confidently bid on bigger projects because you know you won’t have to finance the labor out of your own pocket. A financial capability letter can greatly improve the strength of your bid, winning you more work.

We work with our clients to align our repayment plan to their pay apps, minimizing the strain of repaying a loan on top of managing your business. Finally, we have a network of experts in industries like insurance, legal, equipment, and more who are ready to help when one of our clients has a question.

If you are interested and would like to learn more, check out How Our Commercial Loan Process Works.

Having the right construction finance partner behind your growth can help you streamline your cash flow and boost your company’s financial health. That allows you to focus on PERFORMANCE — making sure your team has the tools, equipment, training, and resources it needs to do great work. A history of great work boosts your reputation with General Contractors, which puts you in a better position to negotiate new contracts.

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Seeking a Commercial Construction Loan?…

Is there such a thing as “good debt?” Yes, there is. What is the difference between good debt and bad debt? Good debt helps you grow. Bad debt weighs you down.

For example, meet Kelly, owner of Kelly’s Creations.

Kelly has owned and operated the small manufacturing company for 10 years, ever since her dad retired. Kelly is very proud of her fiscal responsibility. In her early twenties, she had a small mountain of credit card debt, which she has paid off. Now, she pays for EVERYTHING in cash, both in business and in her personal life.

One day a customer comes to Kelly with an order too big to fill with her traditional materials budget. It’s a huge opportunity for her company, but she’ll need a funding source. Kelly thinks she’s a shoo-in for a small business loan. She’s never missed a payment to any of her vendors and she has a solid chunk of reserve cash in her bank account.

But what Kelly doesn’t have is credit history. Since she’s never borrowed before, there is no way for the bank to ensure she’ll be responsible with the debt. She is denied the loan.

Debt is not inherently bad.

As Kelly learned, debt is not inherently bad. We know this is true on some level, because most of us take out a mortgage when we buy a home. We may even take out a loan to buy a new car. We accept these forms of debt as necessities. But when it comes to business, many leaders try to avoid debt like the plague.

It is not the plague, though. Debt can be an important part of your business strategy, if you use it wisely.

Types of debt, good and bad.

There are commonly held beliefs on what constitutes “good debt” versus “bad debt.” Examples of good debt are:

• Mortgage
• Lines of credit
• Small business loans
• Automobile loans
• Student loans

These are loans that either pay for an essential in your life, like a house or vehicle, or represent an investment that will pay you a return. Bad debt, on the other hand, has no chance of generating long-term income and/or pays for something that quickly loses its initial value. Bad debt examples typically include:

• Credit cards
• Payday loans or cash advances
• Automobile loans

Did you notice something odd? Automobile loans is on both lists. That is an important point — automobile loans allow you to purchase an essential life item, but the loan itself does not generate income and the item in question quickly loses its value. (Unless you are buying a classic, like the 1969 Dodge Charger, in which case … drive safely!)

Which brings us to the point: It’s not the debt that is bad or good. It’s how you use it.

Good debt is all in how you use it.

It may be convenient to classify one type of debt as “good” and another as “bad,” but these labels do business owners like you a disservice. They strip you of the power to decide how debt will impact your business.

For example, credit cards are commonly thought of as bad debt. But, if you are a small business using a credit card to purchase supplies and you pay the card off every month, this is actually good debt! You are using the money to leverage your buying power and capacity to grow your business (generating long-term income) and you are building a solid credit history.

Let’s talk about another suspect on the lists above: student loans. Investing in your education is great, except expected median salaries haven’t kept up with the cost of a degree. For example, if you borrow $80,000 to get your bachelor’s but only earn a $70,000 salary afterward, you’ll feel the pinch of those payments when they get added onto the rest of your household debt. The situation is even worse for students who take out loans and do not receive a degree.

Even merchant cash advances, which we talk about at length and warn manufacturing and construction subcontractors away from, are not inherently bad debt. Are they risky? You bet. Do we caution business owners in industries like manufacturing and construction away from them? All day every day. But, plenty of business owners use MCAs effectively. They understand the payment structure and know their cash flow can support it.

See how it gets complicated? The real question is not in whether a source of funds is good or bad, but whether you will use the money in a way that allows the investment to pay for itself through business growth and revenue generation.

The ability to borrow in order to capitalize on big opportunities, like Kelly and her customer’s big order, can be the difference between growth, stagnation, or decline for your company. And here’s a tip:  Stagnation is decline you haven’t noticed yet.

So now you know that debt is neutral until you use it. The next question is, how much debt should your company have?

How much debt is too much debt?

Now we come to the crux of the matter: balancing opportunity with debt. How much debt is too much debt? There is no hard and fast answer; it depends on your business’ growth plans, the type of debt and cash flow. You can and should keep an eye on your company’s overall debt, especially as it compares to your total income.

This is something your CPA should be reporting on each month — you do have a CPA, right? If not, read this next: 4 Signs You Need to Hire an Accountant for Your Commercial Construction Business.

The fate of your debt lies in your hands.

Are you worried about Kelly? Don’t be. She found the funding she needs, and has since opened up lines of credit with a few of her suppliers and hired a CPA to help her develop financial strategies that will grow her business. She still pays for most items in cash — old habits die hard.

YOU can learn from Kelly’s mistakes. Debt is not an evil boogeyman lurking in the shadows waiting to destroy your business. Debt, when used correctly, can open doors to new opportunities for your business, help you achieve your goals, and give you the foundation you need to GROW.

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Borrowing Capital is a Smart Way to…

“You’re either growing or you’re dying” is a popular business idiom. For some companies to grow, they rely mainly on customer referrals and organic market growth. For everyone else, you either need to generate more leads, capitalize on bigger opportunities, or some mixture of both.

Here’s another business quote, “You have to spend money to make money.” In order to execute a lead generation strategy or say YES to the next big job, you will need extra capital. Borrowing capital makes a lot of business owners nervous, especially in cash-flow volatile industries like construction and manufacturing. We wrote this article to show you how to borrow money the smart way in order to grow your business.

Know WHY you are borrowing and for WHAT.

Do you need a short-term loan in order to take advantage of a supplier’s discount, or an influx of cash to move forward on a new location or launch a new service line? Knowing WHY you need the money — the goal behind WHAT the loan is expected to do for you — can help determine which funding option is right for you.

Are you borrowing capital to fund a marketing or advertising strategy? Make sure you have clear goals around the campaign. Ultimately, the new leads generated by your marketing should more than cover the cost of the loan. Marketing is a long-term investment, so your funding options should have longer payback schedules.

Are you ready to take on a larger project, but need funds to cover the first few months of work? Commercial construction subcontractors often need a cash flow boost when they mobilize on a new job. It’s just the nature of the industry. This kind of short-term need benefits from short-term funding options that can be paid back once you start getting paid for the job.

At the end of the day loans for existing businesses fall into two categories:

Loans for tangible investments, like property, vehicles, or equipment. This is used for items you need and can pay off using the existing cash flow of the business. In other words, your business should be able to handle the monthly payment of the loan.

Working Capital Loans allow your business to take on existing work and are needed when certain costs are incurred by the business that fall outside of when you are paid by your customers. If you need money to purchase materials or pay for labor associated to existing work you have not been able to invoice or be paid for yet, this would be the loan for you.

Only borrow what you need.

When lending partners tell you how much they could loan to you, it can be hard to walk that number back. Think of all the things you could do with all that money, right? Wrong. Borrowing more than you need is a great way to increase your company’s debt right when you’re trying to grow.

Figure out exactly how much you need to accomplish the goal you identified previously. Borrow that much and no more. Remember, if you need cash later it will be easier to get if you have successfully paid back your first loan.

Getting more money than you need and therefore using the wrong type of loan to pay for the wrong items will put your business in jeopardy if something goes wrong.

Research your funding options.

Every funding option has advantages and drawbacks. It’s important to do your research and choose the one that best works for your company and your business goal. A daily debit or Merchant Cash Advance (MCA) may seem like the perfect “quick cash fix” for your short-term growth goal, but they come with a host of challenges for commercial construction companies. Here is a “cheat sheet” of the common funding options to get you started.

Small Business Loans are one of the most traditional form of small business funding. Whether you secure your loan through a bank or a lending partner, most small business loans have competitive interest rates — fixed or variable — and a set repayment schedule. They require a strong credit score and collateral to back up the loan in order to qualify. Since the Great Recession, it has become significantly harder for companies in industries like construction and manufacturing to qualify for traditional loans like these. These loans will rely heavily on your personal credit.

SBA Loans are small business loans of which up to 80% of the principal of the loan is guaranteed by the Small Business Administration. This reduces the lender’s risk and opens new funding opportunities for small business owners. The requirements for an SBA loan are similar to a small business loan, with the addition of your business qualifying as a small business according to the SBA. These loans also will rely on your personal credit and have a minimum credit score requirement of 650.

Commercial Credit is a pre-approved amount issued by the bank or lending partner that your company can access at any time. Commercial credit is often used to cover unexpected costs or to take advantage of a sudden business opportunity.

Working Capital Loans cover a company’s routine operational expenses such as payroll, rent, or debt payments. This type of loan is good for companies that experience uneven or cyclical cash flow cycles. For example, many manufacturing companies need short-term funding during the fourth quarter, when their customers are focused on selling the goods already made. The manufacturing companies repay the debt in the spring and summer, when orders pick back up.

Invoice Factoring is commonly used in commercial construction and manufacturing. The factoring company works directly with your GC or customer to verify an invoice is accurate and owed to you, then you are advanced up to 80% of the invoice amount. When the factoring company receives payment for the invoice, it repays itself the amount advanced to you, plus a fee. Any remaining balance is sent to you. This is a good option when you have invoiced your customer already and are just waiting for your customers to pay you, but they are not paying fast enough. This is not good if you need cash before you are able to create the invoice.

Purchase Order Financing is like invoice factoring. The PO financing company will pay your supplier to fulfill the order. The customer pays the PO financing company directly. It deducts its fees and sends any remaining balance to you.

It’s important to note that in both Invoice Factoring and PO Financing situations, the lender is most often directly involved with your General Contractors, customers, suppliers, and vendors.

Merchant Cash Advances (aka Daily Debit Loans) are “quick-cash” solutions designed for industries with a daily cash flow cycle, such as food and hospitality or retail. MCA repayment involves a daily or weekly draw from your checking account, which can make forecasting your cash flow even harder than before. While MCAs work in industries like hospitality or retail — where a daily cash flow can potentially meet or exceed the daily debit — it is almost impossible for commercial construction companies to keep up, especially in the months after a project is completed but the loan is still active.

MCA loans are very easy to get and can be deposited in your account within days which make them very tempting to take on. However, like most things that are easy they can come with some significant drawbacks. Anytime the repayment cycle of your loan does not fall in line with how your revenue is realized you will likely have a problem. When those problems come the solution is NOT TO TAKE ON ANOTHER ONE!

Read why MCAs don’t work for commercial construction subcontractors.

Borrow capital to grow.

Once you have identified the goal of your funds and the potential funding sources, it is time to make sure you and your company are ready to capitalize and mobilize. Forgive us one more aspirational quote, “When opportunity knocks, be ready to open the door.”

What do you need to do to maximize the potential benefit this influx of cash could give your business?

• Make a game plan for the funds based on your goal.
• Get your business and personal financials in order. That includes credit reports and tax returns.
• Establish relationships with other partners and vendors. If any of them can cut you a deal if you act quickly, that can be part of your funding strategy.
• Talk to the experts about your funding options and YOUR unique business needs.

Growing with Mobilization Funding.

If you are a commercial construction subcontractor or manufacturing company looking for a funding partner who can help you grow and succeed — you’re in the right place. We have structured our lending platform and services to serve the unique cash flow cycles of your industries. We work WITH you to create the unique lending solution that works FOR you.

You can apply online here, or give us a call at 813-712-3073. (Don’t worry — a real person will answer the phone and be ready to help you.)

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Your Construction Finance Blueprint

Most subcontractors need capital to cover the costs of a new project before the first invoices get paid. The high costs of mobilizing on a job — plus the reality of waiting 30 – 60 days or more for your first payment, all the while meeting weekly payroll and regular business expenses — would be hard on any business. Add in the 10% of each payment being withheld for retainage, and there’s a lot that can go wrong. Which is why so many subcontractors look for alternative funding solutions, like merchant cash advances (MCAs) or invoice factoring.

MCAs are a notoriously risky venture for a subcontractor, but what about invoice factoring? The answer is less straightforward. Invoice factoring can work for subcontractors, but it also poses risks of its own.

What is Invoice Factoring?

Business invoice factoring is not a loan; it is an advance of receivables. Here’s how it works:

• You submit an invoice to your General Contractor.
• The invoice factoring company will verify the invoice with your General Contractor and get their approval and acceptance of the invoice amount and that it is in fact owed to you.
• Once approved, the factoring company will advance you a percentage of that approved invoice, usually between 70% and 80%.
• When the factoring company receives payment from your general contractor, it will repay the amount they advanced to you, plus their fees (typically 1% – 5% of the total invoice amount).
• Any remaining balance will be sent to you.

Invoice Factoring and Construction Subcontractors

You know how tough it is to get a loan from the bank, so despite its challenges, factoring can be a good way to get the cash you need to make payroll and cover your expenses. Especially if you are working on multiple projects, a good relationship with a factoring company can really help your business overcome a cash shortfall. If you haven’t worked with an invoice factoring company before, do yourself a favor and research your options before you sign an agreement.

First, look for a company that works with construction and understands your business. This will be your first hurdle, since only a handful of invoice factoring companies will work with construction subcontractors. The vast majority have written (or unwritten) policies against you. From their perspective, some of the payment terms and contract language for construction subcontractors is simply too complicated and too risky.

If it sounds too good to be true, it probably is. Beware a company that offers to advance more than 90% of your invoice. Remember, the average advanced percentage of an approved invoice is between 70% and 80%.

Be honest with yourself when it comes to payment schedules. Delays in construction receivables are almost inevitable. Most factoring companies will charge a fee for the first 30 days the invoice is outstanding and then an additional fee for every 5-10 days after the first 30 days. Make sure you consider honestly the actual time between invoicing and receiving your payment so you will know the actual factoring costs and adjust your project bid accordingly.

Invoice factoring companies can be a great help to your cash flow, however most will require that they have the first position lien (UCC-1) in order to approve your invoice. That means if you have a current MCA or bank line of credit you are unlikely to qualify without first paying them off or getting them to subordinate their UCC position to the factoring company. This can be done but it can also take time to accomplish so make sure you account for the time it may take.

Invoice factoring, by its nature, requires the cooperation of your General Contractor. Your GC will have to approve or verify your invoice and through the Notice of Assignment (NOA) the factoring company serves on the GC they will then be obligated to send the payment directly to the factoring company. Some GCs have policies against factoring receivables, while others may be resistant to agreeing to this change, you should read your contract and have the discussion with your GC to let them know what you are trying to accomplish and how it will help their project overall by helping you to perform.

Lastly, invoice factoring can be an “all or none” solution. Many factoring companies require you factor all receivables for that particular job, even if that wasn’t your original plan.

If you rely on factoring, you must ensure you have enough cash on hand to make it to that first pay app. After the first pay app, be extra careful to spread out the advance in order to cover your project costs through your next billing. If you’re working on multiple projects, that may result in taking funds needed for another job — essentially robbing Peter to pay Paul, which is a risky option.

Other funding options for construction subcontractors

If factoring falls through, many subcontractors will turn to an MCA. Don’t! MCAs seem like a shiny, quick fix, but too often one MCA leads to a crushing cycle of debt that can seriously damage your company’s cash flow and overall financial health (and your sanity).

Read the Guide to Merchant Cash Advances.

There’s also Accounts Receivable Financing, which is similar to factoring in that your unpaid invoices are being used to secure funding. In AR financing, your accounts receivable is the collateral for a line of credit.

The truth is that, while options like invoice factoring and AR financing may help, they don’t solve the REAL problem subcontractors face. You’re short on cash from Day 1, and playing catch-up until retainage checks start getting paid.

You need money before the invoice just as much as you need it after.

The key is to secure financing before the project begins, and then work with a partner that understands your business’s needs and challenges.

That’s where we can help.

We offer funding when you need it AND we know the right factoring companies to work with.

 Invoice factoring, traditional bank financing and MCAs were either under-servicing, or actually hurting, a lot of great construction subcontractor businesses. They needed a better option, so we created one.

Mobilization Funding offers funding when you need it — up front, before the job even begins, so that you can cover project costs, from bond premiums to payroll, materials, equipment rental costs, and more. Rather than advancing cash based on your credit worthiness, we’ll review your contract and schedule of values and work with you to understand your needs and generate a custom funding and repayment schedule.

And, if we find that invoice factoring is the best option for your business right now, we are going to do the right thing and happily connect you with a factor that knows how to work with commercial subcontractors and contractor companies. Call us at 813-712-3073 or click here to get started.

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Your Construction Finance Blueprint

Merchant Cash Advances, or MCAs, are a funding option for all types of businesses who need quick cash. But as a “quick fix” solution, it can come with a host of challenges that may lead to huge problems for small businesses, especially for those in the commercial construction industry.

That’s right. MCAs are bad for construction businesses. That includes YOU, general contractors and subcontractors reading this right now. 

And hey — MCA lenders and brokers, this is a good read for you, too. 

Let’s break down what Merchant Cash Advances are, how they work, and how they can create a vicious cycle of debt for construction businesses.

What is an MCA and how does one work?

Merchant Cash Advances, also called an MCA or Daily Debit Loans, are a type of funding that is based on the average amount of cash flowing through a business’ bank account on a monthly basis.

An MCA is actually not a loan, it is an advance on “future receivables” or future sales of the company. Therefore, the amount of the advance and the cost of that advance is based on the following information:

The business owner’s personal credit score. This is important to the lender because they use this to judge the character of the person and their likely desire to make sure the MCA is paid back. 

Did you know that just applying for an MCA can negatively impact your credit? Here’s why. Most MCAs are sourced through a broker and rarely does the business owner ever get to work directly with the actual lender. The broker gets an application signed and then sends it to multiple lenders who all pull the business owners credit score. 

Those multiple inquiries in a period of just days really hurt the business owners credit score. 

Bank account information. The lender will look at the number of deposits made into the account on a monthly basis to determine how frequent new money is coming into the account. They’ll also look at the total amount deposited into the bank account. This determines the likely revenue of the business. Finally, they’ll check the average daily balance in the bank account. This is used to determine how much can reasonably be auto-debited from the account every day without risk of a payment being bounced. 

Using this information, the MCA lender then decides how much the business is qualified to receive for an advance, the cost to be applied to the advance amount (this is the cost of the money to the business owner), and how many business days it will take for the advance to be repaid, (typically 6-12 months).

The cost of the advance is determined using a factor rate, which is a percentage of the lump sum for which the client is approved. Factor rates can vary from high single digits to as much as 50% or more. If a client is approved for a $100,000 advance with a factor rate of 30% then the cost of the loan is $30,000. 

The total repayment of the MCA is the lump sum of money plus the cost of the factor rate percentage. In the example above the total repayment amount would be $130,000.

The next important detail is the time frame to be paid back – typically 6-12 months. It’s critical in determining the actual repayment of the MCA and what the impact will be to daily or weekly cash flow. 

The real cost of a Merchant Cash Advance. 

As a general contractor or subcontractor business owner, you need to know what you are signing and what the real cost of that funding is to your business. If the factor rate is 30% and you can pay it back over 12 months that is very different than 6 months. At 12 months you are actually repaying the loan at an annual rate of 60% interest. 

Does that surprise you? If it does then we’re glad you’re reading this.

It is critically important for the client to know what the repayment structure is and how it will impact their business over the life of the repayment period. For example, if you only will be on a project for another three months and you have a six-month payback period then you need to know you have more work starting quickly and enough work to be able to actually afford the same daily payment in months four through six of the repayment period. If you do have the work, but you need your cash to get mobilized, then you will likely experience an even bigger problem due to the daily payments.

And this is where MCAs become an inescapable trap. If the borrower is struggling to make the payments, most brokers will try to set them up with another MCA. A second MCA is about half of the amount advanced originally and can be offered by the current lender or through another company. In the MCA world, this is referred to as “stacking” and can bring a situation from bad to worse.

If even a single payment is missed (most often, because the account was overdrawn) the borrower can be considered in default and be charged additional fees or other penalties. Further, each MCA  can (and will) place a UCC lien on the business. As long as those are in place, other lenders such as banks or factoring companies will not provide funding that could pay off the bad debt and get the business back on track. Instead, the business owner (who is already dealing with a huge drop in personal credit score) is told that the only option they have is to take out another MCA. 

It’s like trying to put out a fire by pouring gasoline on the flames.

Finally, many MCA companies will include a Confession of Judgement in their agreements, meaning that as soon as the borrower defaults, the company can file the confession in court. Within a matter of hours, the borrower can find its bank accounts frozen. Some MCAs will even start calling around to the general contractor requiring immediate payment of the advance.

Interested in learning more about Merchant Cash Advances and why they just don’t work for construction businesses?
Download our guide, “The Real Cost of a Merchant Cash Advance” with just one click!

The hard truth: Why MCAs are bad for construction businesses.

The nature of the construction business in terms of payments and finances make Merchant Cash Advances particularly risky. Let’s talk about the reality of how subcontractors get paid on commercial construction projects: 

A contractor’s costs are often more than they are able to collect from their invoice to a GC or owner, especially in the first one to three months on a job. Invoices are only sent once per month, and after the invoice is approved, the contractor has to wait 30-45 days to be paid. 

When the invoice is paid retainage is held back by the owner of the project – typically 10% of the total invoice. Retainage is held until the whole project is finished. So, the contractor only gets 90% of what they invoiced for the month. In some instances, a GC may not release payment to the subcontractor until they know all of the sub’s suppliers and vendors have been paid in full. This puts an even bigger squeeze for cash on the subcontractor. 

Despite these facts, the contractor has to pay their own employees every week, their suppliers when they pick up the materials, or if they have terms with the supplier then perhaps it is only a deposit at first and the balance in 30 days. Either way, it is still before they are actually paid from the project.

Profit on a construction job is NOT evenly distributed throughout the project. In short, what this means is the contractor’s costs are not directly in line with the amount they can bill each month and therefore even though the profit on the overall job may be very good the costs associated to some months as compared to what the subcontractor is being paid can be negative. 

This is where contractor construction payments and MCA loans collide, and it’s not pretty. 

Unless the MCA lender is willing to: 

• (a) take one payment per month
• (b) only on the day that the sub-contractor is paid from the project(s) 
• and (c) only if that month’s costs are less than what the subcontractor is actually being paid 

the subcontractor will 100% be in a very bad spot and likely default on the daily repayment structure.

For example: A concrete contractor working on a five-story building can bill a certain portion of the contract each time a floor is poured. Imagine if the contractor spent their first three weeks on the project at the end of one month, but the actual concrete pour wasn’t until the start of the following month. In this example, the contractor would have incurred nearly 100% of the cost of the floor but received none of the revenue associated with it.

The gross profit margin of the average construction business is 20% or less. The overall cost of the advance to the client is more than the profit they will be able to make on the advance amount. 

Remember the construction business example from earlier? That company took a $100,000 Merchant Cash Advance and needs to repay $130,000. That contractor company will need to invoice and be paid $1.3 million in order to create $130,000 of free cash to pay off the MCA loan without any problems. 

Also, this means the example construction business will not be able to use any of that profit for their own overhead expenses. It only goes to repay the MCA loan. Also, don’t forget the business will only get paid one time per month and need to pay all of the project-related costs out of the money they receive or their project will start to go very bad and the rest of the money they are owed for the project will be in jeopardy.

MCAs can be useful tools for businesses that have daily incoming revenue, such as a restaurant or retail store, but they don’t work well in the construction industry. Are they fast and easy? Yes. Is that worth the long-term trouble they can cause? NO.  

We are the alternative to MCAs. 

Many business owners are unaware of the alternative options available to them. Frantically trying to make payroll every week, with slow-paying clients and unforeseen expenses taking a toll, the fast cash of an MCA can seem like a good idea, regardless of the high cost.

We get it! There are times you need money quickly to do your work. You just need some additional cash so you can focus on what you do best: Getting the job done. 

Mobilization Funding is a smarter option for construction businesses that need short-term working capital for a particular project.

We offer: 

• Competitive rates
• No early payoff fees or penalties
• Loan repayment schedule based on when you will be paid for your work
• Flexible funding schedule depending on when you need it
• Qualified customers can also receive assistance in paying off MCAs

So whether you’re laying asphalt on a new highway, clearing debris after a hurricane, installing solar panels or replacing the windows in your county library, we built a program designed to help your business perform. 

Do you need to talk to an expert about what to do with your MCA debt? Call us at 813-712-3073 or click here.

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Merchant Cash Advance Versus a…

When it comes to managing business cash flow, construction subcontractors face a steep uphill battle as they take on new projects. With 45-60 days or more between starting the job and receiving their first payment, the subcontractor needs enough cash on hand to cover payroll, bond premiums, equipment leases, vendor or supplier payments, and other project expenses. For many subcontractors, Construction Contract Financing is needed in order to fill that gap.

Commercial construction contract financing allows subcontractors to borrow dollars they need for the early stages of a job by using the value of their contract as collateral for the loan. Yes, that’s right, their actual contract!

Mobilization funding, also known as mobilization financing, is a commercial construction contract financing option for subcontractors who do not have the extra cash in the business needed to start the project or are not able to get bank financing for one reason or another. A mobilization funding loan is a short-term option that allows you to borrow up to a certain percentage of the total value of the contract, then repay the loan with the dollars received from the project once work is performed and paid.

Here are a few things to keep in mind when looking for construction contract financing:

This type of financing depends on the subcontractor having a signed contract with a general contractor, property owner, or the party that is paying for the work. The contract will layout job requirements, payment schedule, scope of work, and the total value of the contract.

The important aspect of a construction contract loan is that the cash from the loan is used for project-related costs.  This ensures that the project will go well and that the contract can be invoiced and paid.

This is what allows the lender to use the performance capability of the subcontractor and their contract as the key factors for approving the loan versus the company’s financial documents and credit.

The lender can offer a type of pre-approval for a job that the applicant is bidding on or considering, but a loan cannot be issued until the contract is awarded or executed.

Learn more about commercial construction financing.

Commercial construction contract lenders typically require that the borrower has been in business for at least two years, have a history of performance and be able to provide bank statements and some other corporate documents.

Click here to sign up for the Mobilization Funding newsletter for more tips and strategies to help you achieve your goals.

In its most basic form, a bid is the sum of estimated project costs, overhead expenses, and net profit margin. There are countless factors that must be considered when drafting a bid, and in some ways, it can be more of an art than a science. One job that goes wrong could take years to financially recover from.

Click here to read our guide to calculating your profit margin

Here are 3 bidding mistakes that are putting your profit margin on the line:

Pitfall #1: Profit is Caught Up in Retainage

If you build in a 10% profit margin and your general contractor is withholding 10% retainage, stop kidding yourself. You are dependent on that retainage in order to make money on the job, and you shouldn’t be. Waiting to pull a profit from retainage leaves you at a huge risk of a cash flow shortage until the job is completed and your retainage is paid out, which can take a long time to be released.

You might think, “Well, that’s all right! I have another project that is wrapping up now, I’ll get my retainage from that, which will be my financial cushion.” Answer: It’s not all right. What if you have a common setback like a weather delay? Or if one of your subcontractors, material suppliers or vendors make a mistake on the job or their costs suddenly increase? What if the property owner is delaying payment to the general contractor for an outside reason? Essentially, what if that other job’s retainage payout doesn’t come by the time you need it or worse, doesn’t come at all?

Given the construction industry’s chronic problem with payment delays, leaving your profit margin tied up in retainage is one way to lose it.

So before you bid, be sure you know how much retainage the general contractor will withhold. If it pushes your bid far above your comfort level you can attempt to negotiate a lower retainage but if that doesn’t work, you’ll need to increase the amount of your bid to ensure that for each billing, you’re bringing in some profit.

Pitfall #2: Not Accounting for Overhead Expenses or the Cost of Capital

There aren’t many subcontractors operating today without funding from outside sources. Whether you use a factoring company, bank line of credit, SBA loan, merchant cash advance, or mobilization funding, no funding source is free. The cost of the funds you need must be built into the project costs of your job (or depending on the type of capital, into the overhead calculations), rather than digging into the project’s profit margin.

If you have an established relationship with a lender, you can use a term sheet or other breakdown of the cost of the funding you need for this particular project and include that in either the project costs or overhead expenses in your bidding calculations. If you will be securing funding for the first time on this job, do some shopping to identify the lender you want to work with first, and get a cost estimate based off of your business’s needs and expected cash flow.

Note: Beyond the term sheet, be sure you understand the details of your agreement with that lender. For example, if you are working with a factoring company and your rate doubles if the invoice takes more than 30 days to be paid, you may need to use that higher figure in estimating the cost of that capital.

Pitfall #3: Lowballing a Bid to Land a Dream Job

Many companies will submit an artificially low bid, thinking that by accepting a lower profit margin now, they will land the big job they’re looking for and open up bigger and more profitable projects going forward. (You might also think you can generate profit through change orders, which is another risky approach.)

The problem is that if anything goes wrong, that ambitious new project could mean financial ruin for your company, late paychecks for your employees, delayed payments to your vendors and sleepless nights for you, the business owner.

This puts you on thin ice from the start. Murphy’s Law states that whatever can go wrong, will go wrong, and there’s an awful lot that goes wrong on construction projects. When you start to feel that ice start to give way, you will be forced to do things you normally wouldn’t, like cutting corners on the job, taking out last minute daily debit or Merchant Cash Advance (MCA) loans you can’t afford and ultimately, damaging your reputation with the general contractor you were trying to impress in the first place.

Subcontracting companies are known for operating on thin margins, but that doesn’t mean you have to. If you’re still reading this article, you likely have experienced the disastrous results of at least one of the pitfalls listed here. You understand the problem, and how easy it is for everything to turn upside down. You deserve to sleep soundly at night, to take regular paychecks home to your family, and to be compensated for the risk you took by being an entrepreneur in the first place.

Yes, if you avoid these common mistakes, you likely will be bidding more than your competitors, but the economy is booming and the iron is hot. Your work is valuable, and it’s needed now more than ever.

Now go out and get paid. 

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Decreasing Profit Margins in Construction & What You Can Do to Protect Yours