Trade contractors carry a disproportionate amount of financial risk when they join a construction project. Securing financing, then, becomes a crucial skill for trade contractors to have.
On a project that runs for three, four, maybe six months, a big general contractor might have enough cash reserves to pay their bills and their staff. Smaller trade contractors usually don’t. Instead, they have to seek outside financing to cover all their operating costs.
There are several places you can turn for financing. Here are three tips to help you navigate those choices and submit an application that will get you the cash you need.
If You Hope to Apply for a Loan or Line of Credit, Get Your Documentation Ready
Banks are generally the first place business owners turn to when they need financing because, well, that’s where the money is.
To qualify for lending, whether that’s a business loan or a commercial line of credit, your bank will ask for a long list of documents and proof that you’re a qualified applicant. The team at Commercial Capital LLC has a list of what these requirements look like, which include:
- Proof that you have been in business for several years.
- Proof that you have collateral, or some kind of asset the bank can collect if you’re unable to pay back the borrowed cash.
- Proof of revenue and profitability.
- Financial ratios, such as your debt-to-equity ratio, to provide additional financial perspectives on the performance of your company.
- Proof that you can adhere to certain lending covenants or rules you must follow to keep that line of credit active. These could include minimum thresholds of liquidity and repayment terms.
The big lesson: If you want to obtain that financing in full and as quickly as possible, you need to have your company’s documents accessible and water-tight.
Start With Local Credit Unions and Regional Banks
When seeking financing, big national or international banks might not be the best starting point.
Instead, look to local credit unions and regional banks, which have a better understanding of the local market you’re operating in. These organizations will likely already have relationships with developers, builders, GCs and all of the other businesses you could partner with on a construction project.
Unfortunately for trade contractors, these are also the financial institutions experiencing some of the most strain right now. As such, commercial lines of credit might not be as available as they once were.
“Ongoing concerns over the health of US regional banks and commercial real estate may lead to credit contraction, with initially negative effects on small and medium sized enterprises (SMEs),” Goldman Sachs analysts Maria Vassalou and Amy Yifan Zhou write.
Understand That You Have Options Beyond Banks and Lending Institutions
Beyond bank financing, you have other available sources of cash, including:
- Material financing services, which will front your materials costs and extend longer payment terms to your business.
- Invoice factoring and invoice financing, which give you access to cash now against the value of unpaid invoices.
- Supplier payment terms, which you can negotiate to get more favorable payback terms or material prices.
Some of the emerging financing options available to trade contractors give businesses flexibility that didn’t exist before.
“These new financing solutions come in the form of 120-day terms, instead of the 30-day industry standard,” Billd’s Christopher Doyle writes at ForConstructionPros.com. “These longer terms still allow suppliers to be paid upfront, while also providing flexibility to manage other needed purchases and help lock in the best prices with the negotiating leverage of a cash buyer.
“When it comes time for labor costs, new, reliable advance financing tools have begun to infiltrate the marketplace. These new pay advance options will help subcontractors address rising labor costs in the construction industry, and the severe impact it has on cash flow and overall liquidity of commercial construction projects. They stabilize cash flow and allow subcontractors to continue to grow their business.”
Whoever you solicit financing from will need to see your company’s documents and financial records. Make their due diligence easier and faster by ensuring your documents are readily available at a moment’s notice.
That’s something eSUB can help with. To find out more, schedule a demo today.
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