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 funding — a strategic financial choice that gives businesses like the construction industry the agility and adaptability they need to thrive
Bank Funding… Harder Than Ever to Meet Requirements
Banks always seem to be the first stop for financing. However, banks have become very picky about who they work with. They often avoided offering funding to construction companies, even when times were 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 startups fail within the first five years of starting up. And not helping, Banks suffered greatly during the recession in 2008-2009 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.
What are the Benefits of Alternative Funding?
Even if bank loans were easily available, one of the biggest contrasts of alternative funding comes with 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 financing options, customized to meet your specific needs.
- Flexible terms, often with no long-term contract requirements.
- Qualifying for alternative funding can be less stringent than banks. Some options, like factoring, rely primarily on your client’s creditworthiness, not 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, in order to take on new, larger projects.
Popular Alternative Funding Options 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. It’s a great way to generate capital without taking on debt or giving up equity. But like Venture Captial, Crowdfunding can be 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 credit card transactions or daily 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 Option for 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 financing.
>>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 Funding 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 both supplying alternative funding to our clients and direction to other companies when someone else’s solution is a better fit.
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