In return, they provide up to 90% of the AR value in the form of a loan for payroll. Payroll financing is a type of invoice factoring, where you agree to sell your AR to the funding company. 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. Meeting payroll needs is one of the biggest challenges for construction companies, especially on a new project. The lender pays the supplier directly and the contractor pays back the loaned amount after a certain time period. Typically, this type of funding is not a loan, but an agreement between the contractor, the supplier, and the third-party lender. There are alternative lenders who specialize in providing funds for construction materials. 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. 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. This is the gold standard for working capital lending. 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. 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. 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.Ĭash flow in construction is complex every project has associated costs and an expected profit. Be careful when putting your home or retirement fund up as collateral for your business project needs. The construction industry is infamous for delayed schedules and slow payments. ![]() This strategy works, but it carries a tremendous personal risk. Personal FinancingĬontractors 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. Before you take an MCA, we invite you to read our guide: The Real Cost of a Merchant Cash Advance. Even just one small MCA can spiral into a whirlpool of debt that drowns you and your company. MCAs are BAD for construction contractor companies. 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. The money is quick and feels easy to get, which should be your first warning. Merchant Cash Advances are, unfortunately, a very common method for contractors to get the capital needed to start a job. Let’s get this monster out of the way first. You can read more about invoice factoring and ABL credit here. ![]() 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. We’ve written previously about many of the lending products available to 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. ![]() Types of Construction Financing for Contractors 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. 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. Why? It is NOT because most contractors are bad with money. 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. Construction funding for contractors helps cover the costs of payroll, materials, insurance and more before the project begins.
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