The construction industries most problematic catch 22
“You need money to start jobs, you need to do jobs to make money.”
This paradox creates a big problem for the average subcontractor when planning for future jobs or expansion. It puts them in a restrictive position, especially when looking to make the leap into having the capacity to complete larger, or multiple jobs at once. Even if the pipeline of jobs are full, often subs are waiting for payment, which can inhibit the functioning of their business and stall them for future jobs. This is clearly problematic and requires the assistance of lending institutions. Access to funding exists, but proves to not be ideal for this specific industry. Programs like Invoice Factoring and Lines of credit have proven to be supplementary financing that aids businesses in the construction space but never had been a solid solution. Often times credit lines are tapped out, or capital is needed before invoices have been written.
The main problem with lending in the construction space is; available programs aren’t quite fitted to how the industry conducts itself. For instance, putting a subcontractor on a loan program that requires them to pay a structured payment, isn’t ideal for a business that does not have revenue coming in daily. The daily cash flow is important to remain intact for the sake of daily overhead. This isn’t intuitive.
After interviews with multiple subcontractors from across the US, we found that most of the loans supposedly formatted for construction, were giving them more problems then they entered with. We wanted to create something that would enable the flow of more, and larger jobs, and effectively aid the expansion and stimulation of subcontractor’s business.
As a result, “Contract Financing” was formed. In a basic sense, once the contract has been won by the sub, they will be eligible for up to 20% of the contracts worth and have access to that capital before they have started the job. The way that loan is repaid, is congruent to the subcontractor’s payment milestones. In other words, the loan is paid back as the payment for the work is fulfilled. So it is assured that when it’s being paid back, money is still left in the account for operating costs and daily overhead.
Contract Financing provides the means to make the leap from smaller jobs to larger jobs, one job at a time into multiple jobs at a time. Imagine not having to pay out of pocket to mobilize your company every time you win a bid. Imagine being able to bid on larger jobs with the confidence of an investor-backed powerhouse. Imagine not having to wait for slow-paying clients to start your next job. This program creates the means to seize the opportunity.
Other Forms of Construction Lending, and Why They Aren’t as Effective.
Other forms of Construction lending exist, but with not the same intuitive spark. A line of Credit could help with supplemental expenses, payroll, and equipment. The Line of Credit does not prove to be as effective simply because the dollar amount cannot exceed 100k -150k in most cases, and is likely to be tapped out at the times when it is most needed. Having only a limited access to funds, this program works well as supplementary funding but does not solve a big picture problem. Invoice factoring can help get access to the funds you are owed before they are paid, aiding with procuring receivables faster than net 30, 60, or 90. This is a useful resource but does not provide help for mobilizing before any invoices have been written. If cash is needed immediately, a standard Cash Advance is always an option. Depending on the circumstances, The Cash Advance could be useful for business that needs cash quickly. The downside of this is it can hurt the daily cash flow since payments are usually required daily or weekly. These programs are able to work for the purposes of expansion, but do not have the custom-tailored format to truly provide the desired effect such as “Contract Financing”.
Who is this Ideal For?
This is Ideal for the subcontractor who is starting more jobs but doesn’t want to be forced to pay out of pocket. This creates a situation where the job is self-sustaining, and not eating profit margins in order to continue business. This is for the business who wants to create a relationship with a lender who can perpetually grow their business, giving them the means to be successful as an American business owner.
Get in touch.
