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Funding For Construction Companies: Challenges and Solutions

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Finding funding for construction companies isn’t easy.

Your employees expect a regular salary, and with the initial costs of materials and supplies and the less expected costs for equipment repairs or replacements, things add up quickly.

How do you stay on top of the books and provide a steady cash flow for your company?

Enter: working capital.

Unfortunately, getting prepared and staying organized with your construction business loans is no small task, either.

From…

  1. Compiling all of the documents needed to apply for funding for construction companies; to
  2. Combating high interest rates; and
  3. Playing the waiting game

…the construction financing application process is not for the faint of heart.

This guide will walk you through the common challenges of the funding process and introduce you to solutions to your construction business financing problems.

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Flexbase: Your Construction Business Financing Solution

Flexbase takes the headache out of billing and solves your cash flow problems so you can focus on running your business.

When you use our app, you can save all the time spent filling out tedious paperwork.

We can automate payment apps including:

  • Schedule of values
  • Lien waivers
  • Notarizations
  • Prevailing wage
  • Insurance documents
  • AIA forms

We’re also able to integrate with all of your company’s financial data, which makes getting financing (working capital) easier.

You’re able to borrow capital and boost your cash flow instantly.

If you’re thinking this is too good to be true—believe it.

Because the information that would normally take the banks weeks to sift through and approve is already at our fingertips, our customers are automatically pre-approved by our lenders.

Flexbase can…

  • Securely access your financial statements
  • Integrate with each of your bank accounts and business tools; and
  • Analyze all the data before sharing it anonymously with our lenders.

So you can forget waiting weeks — or even months — for funding. With the Flexbase pre-approval system, you can see your approval status in 24 hours.

Gone are the days you spent putting together piles of paperwork for bank visits and negotiations.

Our automated platform has fixed all of the problems of a broken system and makes the process work for you.

Why Do Contractors Often Rely on Construction Company Loans?

Funding for construction companies is a necessary evil in the industry due thanks to the notorious payment lag time.

In short, construction companies are forced to borrow in order to:

  • Make payroll
  • Pay vendors; and
  • Bid on future projects.

Because of the way construction companies bill their clients and are subsequently paid, keeping a consistent cash flow can be tricky.

Bad weather, for example, can double the time it takes to complete a project, delaying a much-needed payment for a company.

Juggling your day-to-day cash flow while also attempting to grow your business can be overwhelming to do on your own.

That’s where business loans for contractors and their companies come in. Unfortunately, the traditional construction business loans application process isn’t without its challenges.

Common Challenges of the Construction Financing Application Process

Between…

  1. Juggling all the documentation required
  2. Negotiating interest rates; and
  3. Trying to budget the time needed to be approved

…the process of applying for funding for construction companies can feel like a logistical nightmare.

But your company needs working capital, and besides, what other choice do you have?

High Interest Rates

The interest rates you’ll see tend to be very high because the risk taken by lending companies is considered high.

Financing fees can accumulate quickly and account for a significant portion of a company’s budget.

For a smaller construction company, 6-10% of the total budget could be allocated towards paying off interested expenses.

To top it all off, if you’re a smaller construction company, chances are the bank or lender will ask for personal guarantees — so you could be putting your name on hundreds of thousands to millions of dollars in debt.

Other loans are structured with liens on your business assets.

Your business or personal assets could be repossessed if you fail to repay a loan within the agreed-upon terms.

Because funding for construction companies could come with personal guarantees, it’s extremely important to read the terms of your construction business loans to fully understand the personal risks.

Documentation

When you’re applying, be prepared to have documentation for business loans for contractors on hand and at the ready.

Financial institutions might (and probably will) ask to see these documents during your application process:

  • 3 years’ CPA-prepared financial statements
  • Jobs-in-progress schedule, with bonded and non-bonded jobs identified
  • Accounts receivable (AR) documents, with bonded and non-bonded jobs identified
  • Accounts payable (AP) documents
  • Appraisals on equipment and real estate
  • Personal financial statements for each owner
  • Bonding company agreements
  • References on credit history
  • List of litigations in progress
  • List of previously completed work
  • References on the company’s job performance

If this process sounds daunting to you, it’s because it is.

But with Flexbase, you can wave goodbye to this headache.

Our app allows you to integrate with…

  • Invoicing tools
  • Project management tools
  • Personal bank accounts
  • Business bank accounts

…that lenders look at to evaluate your funding application.

Because we have visibility into all of these items and tools, your application process is:

  • Faster; and
  • More-efficient.

Plus, because you no longer have to go to the bank each time and apply manually, there is much less room for human error.

Time

The approval process for construction company loans can often take weeks, which is time a lot of construction companies don’t have.

The fact that banks typically require extensive financial documentation with your application coupled with their lengthy approval processes makes the application timeline a huge question mark.

Even if you are approved, it can take days to actually receive the loan you need, and by then, your opportunity could be out the window.

At Flexbase, we already have access to all of your construction company’s payment data.

Our software can anonymously pass all of that information along to lenders so that they have a higher quality, more comprehensive amount of data on your company from day one.

You’ll be rewarded with a number of different lending options that you have prequalified for — without having to play the waiting game.

4 Reasons Construction Business Loans are Often Needed

There are a multitude of reasons your construction business may be faced with a need for up-front cash.

From…

  • Training new employees; to
  • Replacing damaged supplies; to
  • Creating new marketing materials

…construction business loans provide a company with the opportunity to grow and cover day-to-day expenses.

#1: Payroll (Existing and Future)

A company may need financing to:

  • Meet current payroll; or
  • To support additional workers for a large project.

With construction financing, you’re also able to stay on top of the high turnover rate that is common in the industry and replace workers as needed.

#2: Purchasing or Leasing Equipment

You’re able to use working capital towards construction equipment funding.

This could refer to heavy equipment or office equipment. Any costs associated with repairing equipment could be used from the funds from a loan as well.

If a new job requires you to have an extra truck, you’re able to make that purchase and complete a job you may not have been able to otherwise.

#3: Compete for Bigger Projects

With added working capital at your disposal, your company may be more comfortable competing with larger companies.

You’ll have the funding available to cover the necessary costs of a big project, including:

  • Upgrading equipment; or
  • Hiring workers.

#4: Maintain Cash Flow

We’ve already established that cash flow is a broken system in the construction industry.

But, with more funding, you’re able to maintain a steady income, allowing you to:

  • Wait on bid approvals
  • Pay past due invoices; or
  • Cover expenses during slow seasons.

3 Types of Funding for Construction Companies

It’s no secret — construction can be a difficult business to finance.

With its liquid capital, upfront expenses and endless opportunities for paperwork slip-ups, it can be difficult to get a traditional loan.

There are, however, a few things to go over before you apply for construction business loans to show potential lenders that your company is a good risk for financing.

Before applying for any funding for construction projects, consider the following:

  1. Your credit history
  2. Profit margins
  3. Managing your company’s growth and working capital
  4. Personal guarantees

From there, you’ll be able to narrow down what type of funding is the best choice for financing your company.

#1: Line of Credit

A line of credit can be thought of as a loan that works similarly to a credit card.

They are best used for:

  • Payroll
  • Construction supplies
  • Other operating expenses

With this type of funding, a lender gives you a maximum amount you can draw from.

You then take only what you need when you need it and pay back just the amount you borrow.

This flow allows you to continue the cycle and continue to borrow for the life of the line of credit.

A few benefits to applying for and being approved for a general contractor line of credit include:

  • Lower interest rates compared to credit cards or term loans
  • Lower closing costs

A drawback? If you are late on payments or go over the authorized amount, your interest rates will increase, likely significantly.

Be prepared to get all of your paperwork together when you’re planning to apply for a line of credit.

Since a healthy cash flow increases your chances of getting the line of credit, you’ll need to have the AR and AP documents handy to prove it.

Our last tip is to secure a line of credit before you need it — getting your application together, submitting it, and getting approved can take longer than you’d think.

#2: Small Business Administration (SBA) Loans

Small business loans can range from $5,000 to $500,000 to $5.5 million.

You might use an SBA loan to:

  • Pay for materials
  • Hire workers; or
  • Combat the slow season.

SBA loans are guaranteed by the U.S. government through the Small Business Administration.

They are fairly similar to commercial loans, but they often have better interest rates and terms because of the government backing.

But don’t get confused, you aren’t getting your financing through the government — you’ll work with vetted lenders that play by the agency’s rules.

There are two main types of SBA loans:

  1. The SBA 7(a) loan is for working capital.

    • Think of seasonal financing, export loans, revolving credit, or refinancing business debt.
  2. The SBA CDC/504 loan is specifically used for fixed assets.

    • This can include the purchase of existing buildings, land and land improvements (including grading, street improvements, utilities, parking lots, and landscaping), the construction of new facilities or modernizing, renovating or converting existing facilities, the purchase of long-term machinery, or the refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment.

If time is of the essence for your company (and let’s face it, when is it not), you need to be aware that SBA loans can take up to 90 days for approval.

You could see the funds in your account anywhere from 30 days to a couple of months or longer — So get used to playing the waiting game.

The SBA also states that in order to qualify, certain specific requirements (in addition to standard loan qualifications) must be met.

These include:

  • Being a for-profit business
  • Operating in the U.S.
  • Having invested equity
  • Exhausted financing options

#3: Commercial Loans

Commercial loans are taken out for a lump sum with a set payback period and are typically used for fixed assets, but they can also be used for working capital.

Normally, the terms of commercial loans are paid in monthly increments.

Occasionally, however, you may be able to negotiate a balloon loan, where you make smaller payments with a large final payoff.

While this may work in terms of the cash flow cycle for construction companies (due to the big payout at the end of a project) it’s not easy to negotiate because the bank takes a risk in getting its money back.

The average loan approval time is typically shorter than with an SBA loan, but you could be looking at higher:

  • Interest rates
  • Closing costs; and
  • Fees.

How to Get Funding for a Construction Company: Flexbase

Because we already have access to all of your construction company’s payment data, you have already told us everything about your business that a lender would need or want to know.

This includes:

  • Your assessor’s identification number (AIN)
  • Who your clients are
  • Past AIA billing forms

Our software can assess all of the business owner’s payment history data and pass this information on anonymously to lenders so that they have a higher quality, more comprehensive amount of data on your company from day one.

That way, when you login to the Flexbase platform, you’ll be greeted with several different lending options that you have prequalified for.

No gathering paperwork, no triple checking, no headaches.