The economy is super-hot and so is the construction industry; so why is it so hard for a construction firm to get a traditional loan?
Why Banks are Reluctant to Loan
While there are many factors that contribute to the answer, none are more prevalent than the simple truth that traditional lenders (e.g., bankers) see construction loans as too risky and, for good reason.
According to the census bureau Business Dynamics Stats, five years after starting, 63.6% of all construction startups failed, versus 47.7% for mining, as a comparison. To make matters worse, since the 2007-2009 recession, banks took it on the chin and have become even more stubborn.
For the traditional lenders that do play in this space, most need to see a debt service coverage ratio of at least 1.2 to consider making the loan, plus many other factors like having a diverse client base, a lengthy track record and so much more.
What’s the Answer for Construction Companies?
For the small to average size construction firm, this is tough sledding. When bankers cannot service a loan, they have two choices. One is they politely say no and send them home. For a contractor that banks with that institution, this is equivalent to a hand in the back as they walk out the door.
The second choice is to offer them options, referring them to an alternative funding source. Contrary to the hand in the back, the contractor is thankful and quickly forgets about taking their checking, credit cards and other services to the bank across the street.
Factoring Provides a Win-Win Solution
Of course, not all alternative finance vehicles are suited to every need. The banker should have options, given the specific needs and circumstances of the loan application. One often viable alternative is receivables financing (aka factoring).
Using this method, the contractor sells his invoices for a discounted rate. The contractor is typically advanced 70 to 80% of the invoice at the time of the transaction. Once the invoice is paid by the general contractor/debtor, the contractor is wired the balance of the funds less the finance fee.
The advantages of this method of financing is that you create no debt in the transaction and you seek and use the factoring when you need it. The advantage to the banker is that the bank retains a happy client. With the ability to use factoring, the contractor can return one day with a brighter financial position and becomes an even bigger client to the bank!
Here’s How You Can Offer Factoring as an Option
No one understands the advantages of invoice factoring better than CapitalPlus. It’s all we do and we place a special focus on the construction industry. We understand and appreciate the reluctance of traditional lenders to loan substantial amounts of money to smaller construction companies, or those just getting started.
Let us help you help your customers. Call us today at 865-670-2345 and we’ll explain in detail how our referral program works, and how simple it can be to offer factoring to your customers.