Construction Loans Archives - Page 3 of 4

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.

If you found this blog helpful and informative, you may also enjoy our newsletter, with tools and resources to take your construction business to the next level. Click here to subscribe.

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.

Concrete Pour Contractor

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.

Yellow hard hats and one green hard hat

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.

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.

What is a lien?

Liens are utilized for all sorts of property. When a person takes out a car loan, the loan provider is a lienholder that retains the title of the vehicle, preventing the owner from re-selling that car until they are repaid. If the car buyer fails to repay that loan, the lienholder has the right to repossess the vehicle and sell it to recover the amount borrowed.

It is not unlike what happens with mechanics liens. Contractors, suppliers and other parties perform work and then are repaid over time as they progress through the job. Due to the construction industry’s problems with payment delays, the subcontractor needs to have enough money available to cover their payroll, materials, bond premiums, equipment leases and more.

What is a mechanic lien?

A mechanic’s lien is a legal, public document that is designed to guarantee payment to builders, contractors and construction firms that build or repair structures. The term comes from the 18th century, when “mechanics” referred to various types of tradesmen. In most states, a properly filed and executed lien can ensure payment by holding up the property from being sold, transferred or financed. Liens are generally enforced in court and result in a hold on construction project funds as well as foreclosure of the property to pay outstanding debts to the lienholders.

Who has mechanics lien rights?

Builders, contractors, subcontractors, material suppliers, architects, engineers, design professionals, or anyone who performs work or furnishes materials on a job site all potentially have mechanic lien rights.

Why is a lien important?

A mechanics lien is an official document filed with a government entity, (typically with the county) that ensures that the people and businesses who contributed to the construction or renovation of a property are paid.

How do I file a mechanics lien?

Filing a mechanics lien can be a pain in the rear, especially since the rules around them vary widely depending on the state you’re in. You can access free templates of lien notices online, but if you go that route you still need to file the documents yourself. The easiest way to ensure everything is done right is to use an online lien solution like Levelset.

How much does it cost to file a lien?

Filing lien paperwork has some related costs. The recorder’s office, clerk of courts or similar entity for your locality will most likely issue a filing fee. Online lien solutions tend to be very affordable — some cost as little as $19 per recipient for the Preliminary Notice — and they deliver big value for your business in return.

We recommend Levelset to our clients for lien filing. With Levelset and other solutions like it, you provide some basic details about your company and your project, and their team handles all of your filings for you.

Levelset Pricing
Document	Price per recipient, as listed spring 2020
Preliminary Notice	Free
Notice of Intent to Lien	Free
Mechanics Lien	$349
Lien Cancellation	$149

If you want to take the time to do it yourself, you can contact the state or county where your project is located and request information and assistance. But why the heck would you want to do that?

Here is a general outline of the process:

1. Send a Preliminary Notice via tracked, certified mail to the property owner that you are performing work or supplying materials on the job. Different states have different names for this notice, such as a notice to owner (Florida), a twenty-day notice (California), and a notice of furnishings (Michigan). The preliminary notice typically must be filed within 10 days of when you start the job.
2. After you have started the project, provided a Preliminary Notice AND a payment becomes overdue, the next step is to file a Notice of Intent to Lien, which is required in several states. The Notice of Intent to Lien is a warning to the property owner and if applicable, the prime contractor, stating that your business will file a lien on the property in the next 10 or 30 days unless you are paid. A Notice of Intent to Lien is a strong incentive to get the owner to make the payment, as they want to prevent you from filing that lien. Even if it is not required by the state, it’s a good idea to use it.
3. If you do not receive payment within those 10 or 30 days, you would then file a Lien on the property. Liens are filed in the county or municipality where your project is located, and in many states it is required to also send a copy of that lien to the owner and the prime contractor for the project.

Now that you’ve learned the basics of mechanics liens, you can start protecting your right to be paid for your work.

Have you had trouble with lien filings? Are you dealing with a general contractor that isn’t paying you for your work? Mobilization Funding’s knowledgeable team of experts are here for you. Click here for a free consultation, or call us today at 813-712-3073.

For many contractors, securing a commercial construction loan happens when stress levels are already high. The project has started and the crew is on-site or it is only a few days / weeks from starting. Payroll becomes an emergency — how will you pay your team while waiting for the GC to pay you? And how much time, and paperwork, is it going to take to get you the money you need?

There are multiple options for businesses looking for commercial construction financing, including contract financing, factoring, a merchant cash advance/daily debit and SBA loans, but there is no standard set of requirements for what you need in order to apply.

We developed this rough outline of documents and information you may be asked to provide when applying for commercial construction financing. Keep in mind, these may vary depending on the lender, your time in business, credit history and other factors.

Regardless of the type of loan you may want or apply for there is one thing that you should do in order to best help yourself get approved – be ready to tell your story. Your story should include the following:

What is your business and what do you do? Imagine you are speaking to a third grader and they need to understand and explain your business after they hear it from you. If a lender doesn’t understand what your business does, how it makes money, and what you need the money for they will have a very difficult time approving you for a loan.
Be ready to walk through how you got to the point you’re at right now and why you are seeking a loan.
Your plan to repay the loan.
Be ready to walk through your current financial situation — income statement, balance sheet, tax returns, and bank statements.
Be honest, direct, and tell the Lender everything they need to know up front so there are no surprises throughout the process.
Good lenders will run checks and see the problems that exist — it is much better for them to hear about them from you before they find them out on their own.

You may not be the right fit for every lender and that is OK. Give every process you enter the same effort and energy because you never know which one will be right for you.

Applying for commercial construction financing

The first step in securing almost any type of funding is to complete an application with the lending institution. The important thing to know here is that application formats can vary. Some lenders, like us, only require a single-page application that can be filled out in no time. Others, like those that offer government-backed SBA loans, can require many separate forms totaling dozens of pages that take you (and an accountant) weeks to properly prepare.

At a minimum, applications for commercial construction loans typically ask for the following:

Business name, address, phone number and Federal Tax ID number.
Details about the business owners (name, contact info, marital status etc.).
Work history, including amount of time in business, scope of work and references.
If you have any current legal judgments or liens against the business or the business owners.

For more information about financial planning, bidding strategies and project management for your commercial construction company, download our free e-book.

Commercial construction loan documentation

Once your application is complete, you’ll need to submit the supporting documentation. This step varies greatly depending on the lender and type of financing, but generally ties in with the requirements of the application.

Here’s what we require:

4 Most Recent Bank Statements
Year-End Income Statement & Balance Sheet for Past Two Years
Year-to-Date Income Statement & Balance Sheet
Tax Returns for the Last Two Years
Copy of your Contract

Most will also request professional licenses or government filings of your business, such as:

Contractor’s or trade license for the state you are working in
IRS Form stating your business’s Federal EIN Number.
Articles of Incorporation

You can learn more about commercial construction financing here. If you found this information helpful, don’t miss our bi-weekly newsletter, Built for Growth. Click here to subscribe.

Answer 3 easy questions to start your application

Regular invoicing ensures that checks continue to flow in from your client.

Payment delays in the construction industry are a persistent problem. If you want to be paid consistently and on time, you need to be billing consistently and on time. This removes confusion that could occur with the general contractor.

Delaying commercial construction billing also delays invoice approval.

Double paying a contractor is a major concern for property owners and general contractors. Skipping some months and rolling them into one large bill often results in more scrutiny from the general contractor or project owner, slowing down the approval and payment process.

Keep your contract rights in order with scheduled billing.

Depending on the state, not submitting a pay application can result in a loss of your lien rights, or other contractual obligations.

Interruptions in receivables impacts cash flow.

No matter how insignificant a pay application may seem, incoming receivables can be used to pay job costs or operating expenses. Also, if you are working on multiple jobs those dollars can add up to more than expected. After all, your fixed overhead expenses don’t go away.

Delays in billing put more of your receivables at risk of non-payment.

Delaying billing leaves more of your needed capital on the line if a worst case scenario arises, such as the project falling through.

Mobilization Funding can help you avoid stretching your resources too thin. Our a unique lending program can help your company better manage its cash flow throughout the ups and downs of a job. Contact us to get started.

Commercial construction companies need outside funding

Without the ability to secure financing, construction companies have to self-fund all of their project expenses out of pocket. Just in the first 30, 60 or 90 days of a job, a commercial construction company needs enough money on hand to cover the project’s expenses, including pricey bond premiums, plus labor and materials costs.

For short-term projects, the company may need to complete all the work before it can bill for the payment. And if the general contractor or project owner does not pay, it could take years for the business to recover.

This reality limits how many people a company can hire, supplies and materials they can order and equipment they can use. Everything is controlled by how much cash they have on hand.

And in an industry notorious for late payments and razor-thin margins, the risk is particularly high. It can take business owners years to build up a war chest that is sufficient to take on larger and more valuable projects. That, in turn, puts a huge strain on the companies who would want to hire them.

The trouble with traditional lending for commercial construction companies

The trouble with many funding options, however, is that the commercial construction industry has its own complex set of rules, regulations and standards. Lien rights, retention and the bonding system are nearly exclusive to construction and are misunderstood by most lenders.

Even though payment terms are set at 30- or 45-days, the average amount of time before payments are issued is actually 57 to 63 days, according to SageWorks. For lenders outside of the industry, those late payments by general contractors and property owners mean frequently dealing with expensive late fees. The resulting hit on the company’s credit score further disqualifies them from future low-interest loans.

Alternative lenders specific to the commercial construction industry have stepped in to solve this problem, allowing companies to take on more risk and grow to meet the increased demand for their services.

Mobilization Funding is one of those alternative lenders. Mobilization Funding began with the interests of a commercial contractor in mind. That means no late fees, and flexible payment terms set around your work schedule, allowing you to better cover the cost of bond premiums, labor and materials up front.

Funding affects everyone on the job.

If you don’t have the financial ability to make payroll, cover the bond premium, secure needed equipment or pay vendors, your entire project can be put at risk. If one subcontractor on the job cannot afford to cover the necessary costs, they may cut corners, like delaying material orders or putting less labor on the job. Even worse, if a subcontractor fails to pay its vendors or is otherwise unable to complete the job, the general contractor and owner risk a lien being placed on the property.

For many scopes of work, like Structural Steel, HVAC, Electrical, Concrete and Sitework contractors, the cost of material orders, equipment and dump fees early in the project can be incredibly expensive. So for those trades in particular, having sufficient financing in place is critical.

General contractors recognize that this financial strain by a subcontractor can delay or drag out the job, stressing the project overall. However, there are very few subcontractors who are able to have enough cash on hand to do the project without outside funding.

A Financial Capability Letter proves you’re financially prepared to do the work.

Include a Financial Capability Letter in your bid package, showing you have the capital available to do the project right.

The letter, supplied by your funding partner, will state the following:

The amount of funding available
That the funding will be set aside specifically for that project
The name of the project
The name of the general contractor

Often in the form of a loan pre-approval letter, the Financial Capability Letter will state that your company’s financial standing has been verified. The letter also acts as an additional point of reference, making the general contractor or project manager feel more confident in your ability to complete the work on that particular project. In a competitive bidding process, this can make all the difference.

Pro tip! In the pre-approval process, secure a breakdown of how much the loan will cost, then build the cost of that capital into the bid.

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

This type of financing depends on the borrower having a signed agreement with general contractor, property owner, or the party is paying for the work. The contract will lay out a payment schedule, job requirements, the scope of the work that needs to be done, and the total value of the contract. While a lender can often offer a type of pre-approval for a job that the applicant is bidding on or considering, in almost all cases a loan cannot be issued until the contract is awarded.

Learn more about commercial construction financing.

In order to secure commercial construction contract financing, the lender typically requires that the borrower sign a document guaranteeing that all payments on that contract will flow through a controlled account until the loan is paid off. Unlike some other construction loans, the borrowed dollars are restricted to expenses for that particular job(s).

Commercial construction contract lenders typically require that the borrower has been in business for at least two years and be able to provide bank statements and some financial documents.

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

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

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Pitfall #1: Profit is Caught Up in Retainage

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

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Regular invoicing ensures that checks continue to flow in from your client.

Delaying commercial construction billing also delays invoice approval.

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Delays in billing put more of your receivables at risk of non-payment.

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Download our guide, “The Real Cost of a Merchant Cash Advance” with just one click!