Construction companies in the US have been dealing with funding challenges since long before we ever heard of the virus known as COVID-19. The virus and current economy have increased those challenges, but funding is still available for construction firms struggling with cash flow issues if they know where to look.
Bank Funding… Few Alternatives
As a rule, banks tend to shy away from offering funding to construction companies, even when times are good. Many variables are involved in making their decision, but by far the one that carries the most weight is that banks often consider construction loans too risky.
This is not a totally unrealistic perspective, since roughly 63% of construction startups fail within the first five years. Banks suffered greatly during the recession in 2008-2009, and since then have become even more reluctant to offer loans to construction firms.
The banks and other conventional lenders that will still consider construction loans often have stringent requirements that must be met before an offer can be made to a construction company. They look for a specific debt service coverage ratio, a diverse client base, and a lengthy track record, just to name a few. Sadly, not all construction companies fit these specific prerequisites.
What Alternative Funding is Available for Construction Companies?
“Alternative” funding refers to a number of different financing methods used to help businesses with cash flow needs that are not a good fit with bank loans. Under the umbrella of alternative funding, you’ll find financing options like equipment financing, PO financing, materials financing, AR financing, and factoring.
It is best to find alternative funding sources from someone who knows and understands the construction industry. For your protection and peace of mind, they need to specialize in providing funding specifically for construction businesses.
Ideally, they need to be able to help all areas of the construction business, including plumbing, masonry or HVAC contractors, landscapers, demolition and renovation companies, and many more.
What are the Benefits of Alternative Funding?
One of the biggest benefits of alternative funding is that a business is able to access immediate cash, often within 72 hours, and without incurring additional debt. Other benefits of alternative funding such as factoring include:
- Flexible financing options, customized to meet your specific needs.
- Flexible terms, often with no long-term contract requirements.
- Qualifying for alternative funding is based largely on your client’s creditworthiness, not on your or your business’s credit history.
- Some companies offer access to additional services if desired such as back office support like bookkeeping, lien compliance, and more.
- Stress relief, no more laying awake nights wondering how you’ll meet payroll.
- Growth and expansion opportunities – alternative funding gives you the cash you need, when you need it, in order to take on new, larger projects.
- More profitability – with a stable cash flow, you’re able to take advantage of bulk discounts from your suppliers as well as discounts for early payments.
Alternative Funding is Probably a Good Fit
It’s easy to see why factoring and other forms of alternative funding continue to grow in popularity. With few downsides, the benefits of factoring can be transformative to your business.
Factoring allows them to meet payroll, pay their suppliers promptly, purchase new equipment, pay taxes, hire additional staff, maintain overhead expenses, and compete for larger jobs.
CapitalPlus specializes in helping general contractors and sub-contractors succeed with a much-needed infusion of working capital, and we have a national footprint. Contact us to learn the difference alternative funding option can make in your business.
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