Getting financing has always been a challenge for construction subcontractors. Most banks and financial institutions are not comfortable with the industry and work only with larger companies. This barrier leaves subcontractors without many options if they need financing to help pay for expenses such as salaries, equipment, rent, suppliers, and mobilization.
In this article, we discuss seven ways to finance a small subcontracting business.
1) Leverage your suppliers and clients
Construction subcontractors often look for financing because they have cash flow problems. These problems usually occur due to the timing of cash flows. You have to pay suppliers quickly, but clients pay you in net-30/net-60 days. This situation leaves the construction company in the middle, juggling payments.
You can improve your cash flow by delaying your supplier payments while accelerating your client payments. This strategy takes some effort but is an effective way to improve your cash flow without using a lender. You can delay supplier payments by asking vendors for 30- to 60-day terms. This is the same thing GCs and clients ask you to do. Suppliers may be initially reluctant to provide terms to a small company. However, they will become more flexible once you build a track record with them.
You can shorten the time clients take to pay by offering early payment discounts. These programs provide clients with a 1% to 2% discount on their invoice as an incentive if they pay within ten days.
Combining payment terms and early payment discounts helps you match the timing of expenses with the timing of your revenues. This approach improves your cash flow and provides a financial cushion to operate. This method is not perfect and takes time to implement. However, when used correctly, it can be an effective way to finance your business.
2) Construction factoring
Construction factoring is an increasingly popular financing option among subcontractors. Factoring solves the cash flow problems that can result from offering net-30 to net-60 payment terms to customers.
A factoring company can finance slow-paying invoices or progress payments and provide you with an advance. This advance improves your cash flow and enables you to run and grow the company. Qualifying for factoring is relatively easy, and invoices can usually be financed quickly.
3) The Small Business Administration (SBA)
The SBA is a great source of financing that construction subcontractors often overlook. As a government agency that helps with small businesses, the SBA has great programs designed to help small and midsize companies in most industries.
The SBA does not make business loans. Rather, the SBA guarantees loans for banks, which allows banks to lend to small businesses. These guarantees are an incentive for lenders and banks to provide financing to small companies.
The SBA’s Microloan program provides business loans and technical assistance to companies that need less than $50,000. Microloans have easy requirements and are often disbursed quickly. Furthermore, loan providers also offer business management and financial advice, which are extremely useful for entrepreneurs. We highly recommend this program.
The SBA also offers other loan programs, namely the 7a Loan Program, which can help if you need a larger amount of money. However, getting this type of financing is more difficult and takes longer.
4) Supplier financing
Construction companies often run into problems with their supplier payments. Subcontractors usually have to pay suppliers a few weeks (or months) before they get paid by clients. This situation can create cash flow problems and missed opportunities.
You can solve this problem with supplier financing. Supplier financing covers your supplier expenses, enabling your company to fulfill projects. It works through a finance company that intermediates transactions between your supplier and your company. The finance company pays the supplier, and you pay the finance company within 90 days.
Supplier financing programs are available to construction companies that invoice a minimum of $500,000 per month and have a good track record.
5) Merchant cash advances (MCAs)
Construction subcontractors often use merchant cash advances, also called cash advances, to finance their businesses. Cash advances are easy to get and can be funded quickly. However, cash advances are very expensive and backfire when used incorrectly. If you decide to use an MCA, do so carefully and have a plan to exit the loan and pay it back quickly.
Note: Consult a CPA if you are considering a cash advance. The CPA can help you determine if your business will benefit from it.
6) Your own resources
Most small businesses, regardless of industry, are usually financed directly by their owners. As a result, owners inject their savings, mortgage their homes, liquidate retirement plans, and use personal credit cards to launch businesses and pay for expenses.
Entrepreneurs have to invest their own money before convincing others, or a bank, to invest. One word of advice: starting a business is risky, and most businesses fail within a year or two; only invest money that you are willing to lose. We recommend not betting your home or retirement on your business.
7) Friends and family
Many entrepreneurs also get financing by convincing friends and family to invest in the business. Friends and family can invest in one of two ways: they can buy equity in the business and get ownership or provide a loan.
Each option has its advantages and disadvantages. A loan is usually preferable because it allows you to keep control of the business. However, loans have to be paid back and are sometimes secured by personal assets. Consider this option carefully.
Keep in mind that if you accept money from a friend or family member, you may put the relationship at risk. If the business fails, you could lose your business and your friend/family member.
Get more information
Are you looking for financing? We are a leading construction factoring company and can provide you with competitive terms. For more information, get an online quote or call us toll-free at (877) 300 3258.