Almost every business has issues with cash flow from time to time, some much more often than others. Businesses like construction companies can find their cash flow greatly affected by the weather. Other businesses have their own particular type of kryptonite that weakens the company by causing a sluggish cash flow.
The problem can be even worse for a new or smaller construction business, when, in addition to a weak cash flow, they find themselves without access to additional capital. This makes is harder, if not impossible, to bid on more jobs or larger projects, due to the inability to hire additional manpower or purchase new materials as needed.
Knowing other construction companies share the challenges of cash flow issues doesn’t help solve them. Knowing some of the less obvious reasons cash flow problems can crop up in the first place may help you avoid them.
Common Reasons for Construction Company Cash Flow Problems
1. Growing too fast, too quick. While it’s important to always look for ways to improve your business, to work more efficiently and be more cost effective, it’s equally important to maintain focus on your strengths. Don’t let a cash flow issue send you into a panic and make rash decisions based on the hope of making a quick buck. You should be looking to expand your business, but with a plan in place, and the knowledge that growth will require cash.
2. Scope creep can cause cash flow issues if left unchecked. You and your client should be on the same page from the outset of the contract. There should be no surprises on either side. Be specific about the conditions of the project and what’s included and be ready to stand your ground if or when additional requests are made.
3. When your business is somewhat seasonal, your back office financial support is crucial. Too often, small businesses tend to have a good friend or family member in the office, someone they feel they can trust. But how financially educated are they? Can they put together a strong budget, taking into account the seasonal bell curves and making sure allowances are made for rainy months? Without the proper reserves in place, a cash slow-down can mean the difference in whether or not you can pay your crew.
4. Cash advance loans may seem like a quick solution to a cash flow problem, but it’s really more like applying a Band-Aid when you’re hemorrhaging. It can seem very appealing, especially if your company is new or your credit is not so great. There’s usually a minimal amount of paperwork and approval rates are high. But it’s the interest rates that will get you.
It’s often positioned in such a way that what you wind up actually paying can be MUCH greater than what it appears. We know of one instance in which working with a cash advance company actually drove a contractor into bankruptcy.
5. Management of cash flow in the construction industry is difficult. When you’re having to wait 30, 60, 90 days or more to get your money, it can become quite the juggling act trying to make sure expenses are paid and payroll can be met.
6. Limited access to funds. When you’re in a cash flow crunch, you may discover that the funds available to you are extremely limited. Loans to construction companies have been a no-go at many banks for years. Even worse when you’re dealing with ‘paid when paid’ contracts and progress billing.
A Common Sense Solution to Cash Flow Problems
Fortunately, there’s good news, whether your construction company is currently experiencing cash flow challenges or you’ve had them in the past and want to avoid them in the future. You can partner with a factoring company to help alleviate many of the issues caused by a lack of funds.
A factoring company can often provide you with immediate access to significant amounts of working capital, allowing you to pay your crew, pay your vendors and even take advantage of payment discounts when offered. Your credit history is not relevant; instead, it’s the credit worthiness of your clients that’s important.
The ideal factoring company for your construction business is one that specializes in your industry, like CapitalPlus. We understand the financial needs of construction companies and, unlike banks and other traditional lenders, we lend on ‘paid when paid’ contracts, as well as progress billing.