Alternative Financing options for construction companies

In the fast-paced world of construction, securing timely financing can be as crucial as laying a solid foundation. While traditional bank loans have long been the go-to source, they’re not always the most user-friendly or swift solution. Enter alternative financing — a strategic funding choice that gives businesses like the construction industry the agility and adaptability they need to thrive

What is Alternative Financing?

Before digging to far into the specifics, we need to explain its definition. Alternative financing refers to financial services and products that exist outside the conventional banking system. Alternative funding companies might offer one or multiples of the following services: invoice factoring, merchant cash advances, peer-to-peer lending, crowdfunding, and revenue-based financing.

Alternative funding solutions are designed to address the unique financial needs of businesses, offering a lifeline when traditional funding is not accessible or sufficient. This type of financing is particularly useful for businesses that require immediate cash flow to manage operations, invest in growth, or navigate financial challenges.

Are Alternative Financing Companies Reputable?

These statistics provide a glimpse into the numbers behind alternative finance companies funding options.

  1. Growth in Alternative Financing: The market for alternative finance options is projected to grow at a compound annual growth rate (CAGR) of 18.5% from 2023 to 2032, reaching $920.9 billion by 2032. This rapid growth highlights the increasing reliance on non-traditional financing methods by businesses [Allied Market Research].
  2. Factoring Growth: The global factoring market is expected to reach $9.2 trillion by 2026, driven by the demand for quicker access to cash and the reduction in credit risk for suppliers. Factoring is a popular alternative finance option for businesses needing immediate liquidity [Allied Market Research].
  3. Impact on Small Businesses: According to a Federal Reserve survey, 40% of small businesses that sought alternative finance options in 2020 did so because they were turned down by traditional banks. This statistic underscores the role of alternative finance companies in supporting businesses that might otherwise struggle to secure funding [Cambridge Judge Business School].
  4. Demographic Insights: Women-owned businesses are 30% more likely to use alternative finance companies compared to male-owned businesses. This indicates a gender-based trend in financing preferences [Cambridge Judge Business School].
  5. Geographic Distribution: The use of alternative finance options is particularly high in regions with a strong presence of small and medium-sized enterprises (SMEs). For instance, the Asia-Pacific region accounts for 40% of the global alternative finance market [Grand View Research].
  6. Technology Influence: Fintech platforms dominate the alternative finance landscape, with 70% of alternative loans being facilitated through online platforms in 2021. This shift highlights the growing importance of technology in the financing sector and the role of alternative finance partners in providing these services [Grand View Research].

With numbers like these, the data would not suggest a global distrust of alternative financing as a whole.

Traditional Funding is Getting Harder to Get – A Growing Reason for Alternative Financing

Bank always seem to be the first stop when thinking of financing. However, for many reasons banks have become very picky about who they work with. A trend has been to limit, or even deny 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. According to Small Business Trends, over 63% of construction businesses fail within the first five years of starting up. And not helping, banks suffered greatly during the recession in 2008-2009 with many tightening their lending criteria and making them even more cautious during the volatility of today’s economic climate.

The banks and other conventional lenders that will still consider construction loans will 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. Luckily there are alternatives to business loans still available to them.

The Benefits of Applying for Alternative Funding

Even if bank loans were easily available, one of the biggest contrasts to alternative funding comes is the lengthy application and approval times, and inflexible terms. The agility and tailored solutions provided by alternative funding can “check all the boxes” for construction companies looking to capitalize on new opportunities without the wait.

  • Flexible options customized to meet your specific needs.
  • Flexible terms, often with no long-term contract requirements.
  • Credit requirements can be less stringent than banks. Some options, like factoring, rely primarily on your client’s creditworthiness, not solely on your personal or your business’s credit history.
  • Some companies offer access to industry-specific services if desired such as back office support like bookkeeping, lien compliance, and more.
  • Unique solutions – with alternative funding, you’re able to take advantage of tailor-fit options designed around your situation like payment schedules coordinated with industry payments, bulk discounts, and discounts for early payments.
  • Growth and expansion opportunities – if well planned and thought out, using one or multiple alternative funding solutions can give you the cash you need, when you need it

Popular Alternative Funding Sources Available to Construction Companies

“Alternative” funding refers to a number of different financing methods used to help businesses with cash flow when they are not a good fit with bank loans. The options are diverse, each with its own set of advantages that cater to different needs and circumstances. Let’s explore some of the most popular options:

Venture Capital:

For companies with high growth potential, venture capital can be a game-changer. It requires a solid business plan and often means parting with a share of your business. But it doesn’t hinge on credit scores as traditional loans do. Venture capital tends to not be the quickest funding option.

Crowdfunding:

Harnessing the power of the crowd, this option allows businesses to raise funds through small contributions from many people, typically via online platforms – think GoFundMe. It’s a great way to generate capital without taking on debt or giving up equity. But like venture capital, crowdfunding can be very slow to fully fund.

Angel Investors:

Individual investors provide capital for a business or project, usually in exchange for convertible debt or an ownership equity stake. They can be a boon for businesses with a strong personal network and a compelling pitch. But like the last two options, this is not a great choice in time-sensitive funding situations.

Credit Cards:

Literally in your back pocket, the readily available option can be a quick option to supplement your immediate funding needs. However, the available balance tends to be lower than other forms of alternative funding. And of course, we all know that credit cards come with high interest rates and will negatively affect your credit score if not managed properly.

Peer-to-Peer Lending:

This method connects borrowers directly to investors through online platforms. It’s a more personalized approach to lending, often with competitive rates and terms tailored to your business’s profile.

Merchant Cash Advances (MCA):

Ideal for businesses with a high volume of daily credit card transactions or sales, MCAs quickly provide access to working capital with minimal application paperwork. The catch? They often come with very high interest rates and fees, and awkward repayment terms.

>>LEARN MORE: MCA Business Loans: An Funding Option for Businesses with Bad Credit?

Invoice Factoring/Accounts Receivable Financing:

Factoring is another alternative funding option that is a great fit for “high-risk” companies like construction that have long timeframes between job completion and client payment. Although factoring can be one of the quickest to fund on this list, some factoring companies can charge high rates and fees.

Under the umbrella of factoring, you’ll find some highly tailored options like spot factoring, government contract factoring, and volume factoring.

>>LEARN MORE: All You Need to Know About Invoice Factoring

What to Look for in Alternative Funding Companies

It is ideal to find financing sources who know and understand the specifics of the construction industry. These specialized alternative funding partners will not just tailor their financial products to your industry but may also offer secondary services. Add-ons like lien support, compliance, and other risk management, can give added protection and peace of mind to an already stressful occupation.

Is Alternative Financing a Good Fit for Construction?

With the increasing difficulty working with banks, it’s easy to see why alternative funding like factoring, continues to grow in popularity. With manageable downsides, the benefits of these funding options can be a lifesaver to your construction business.

If you’re been turned away from traditional banking, consider a more accessible financial path using one of the alternative funding solutions. To learn if ours is a good fit for your unique situation, reach out to 865-670-2345 or schedule a call with one of our team members. After a quarter of a century, CapitalPlus has helped thousands of construction companies by supplying both alternative financing to our clients and direction to other companies when someone else’s solution is a better fit.

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