Running a construction business requires you to have a steady source of funding. You have to pay your employees regularly and need resources to finance your projects. In most cases, construction payments do not arrive until a project is completed, and even then you still need to wait sometime before you can receive your full compensation.
Construction companies, therefore, often seek additional funding for different reasons. Luckily, there are plenty of funding methods that you can tap depending on your financial needs. This guide will explain how contractors and subcontractors can augment their budget and guide them through the different funding options that they can look into.
- Reasons for needing additional funding in construction
- How to get additional funding in construction
- 5 additional funding options
Reasons for needing additional funding in construction
1. To maintain steady cash flow
Payments in construction happen only after a project has been completed, but this, unfortunately, does not mean that payroll and other business obligations can take a pause. To keep a company’s cash flow going, construction businesses may have to take loans or sell their accounts receivables so they can have access to immediate cash.
2. To keep an adequate level of capital
Construction is a capital intensive industry. You have to invest in resources that would allow you to complete a project, you have to pay your people, and you have to maintain your equipment in order to be able to do your job well. You need a good amount of capital to keep your business going.
3. To fund unexpected expenses
Unexpected expenses can come in many forms. Equipment breaking down may require you to buy or lease new equipment to avoid falling behind on your project schedule. It is also possible that your business may be growing and you, therefore, need a huge chunk of money to be able to keep up with your large-scale accounts.
How to get additional funding in construction
1. Assess your financial needs
Not all financial concerns that construction companies go through are the same. Some financial issues are short-term while others are long-term. Needing money for payroll this month, for example, is not quite the same as requiring a big capital so you can take on a new large-scale project.
Seeking additional funding largely depends on what kind of financial issue you are trying to address. Whatever reason you have for needing more funding, the first step is to know and understand the financial gap that you are trying to patch. This way, you will have a better understanding of how the different construction funding options can help you.
2. Find the right funding option and lender
Finding the right financing method and the correct financing company or institution is very important. You want to be able to have enough cash to address your financial need, and you also have to find the best rates and most convenient payment terms that a lending company can offer.
One key tip is to talk to multiple funding companies and get a quote for their rates and payment terms. It is one thing to have access to additional funding, but it is also a completely different thing to know if you can afford the terms and pay the money back.
3. Go through the application process
Once you determine the right funding method to get your additional funds, you will most probably need to go through an application process. The application process can vary depending on the funding method that you deem most appropriate for your business.
In every application, you will probably have to be ready to have your credit score checked. This is very important as most lenders will verify and assess your current financial status. You may also have to prepare financial statements, a list of your existing clients, and other relevant paperwork.
Think of this step as having to make a business case and proving to a lender that you are financially responsible. If needed, you may want to prepare a formal business credit report or have a qualified business appraiser to perform a business valuation on your company.
4. Have a strategic business plan
It is not enough to secure the money – you also have to plan your finances and how you can improve your financial situation. Some construction companies make the mistake of taking advantage of their additional funding without planning ahead. Usually, they end up being buried in debt and they cannot pay and ultimately default on their loans.
It is very important that you look ahead and plan what you will do with your additional budget and make sure that you are not digging a deeper financial hole for your business.
5 additional funding options
1. Invoice factoring
Factoring is one of the most common funding methods for small- to medium-sized businesses going through a slow season. One of the main advantages of invoice factoring over other types of business financing options is the fact that you do not acquire debt when you factor your invoices.
When you choose invoice factoring, you simply sell your invoices to a factoring company and they give you part of the payment in advance. The factoring company takes care of the payment collection, so you effectively get a portion of your payment and keep your business running without having to wait until your clients pay up.
2. Small business administration loans
Small businesses that are only starting will want to take advantage of the country’s Small Business Administration (SBA) loans program. You can apply for an SBA if you need funding to purchase new equipment for the long-term or if you need working capital to launch your business.
Note that SBA loans will require you to fall under a specific range of qualified net worth and annual income. You will also have to prove that you are in financial need on top of regular loan qualifications. The upside, however, is that SBA loans offer better rates than traditional bank loans.
3. Traditional bank loans
Companies that are already relatively established can opt to take traditional or commercial bank loans. The application process for a bank loan takes longer than, say, applying for invoice factoring. However, bank loans can offer the best rates out of all commercial funding methods available.
If you think you are qualified for a traditional bank loan, be ready to prepare financial statements and go through an intensive application process. Note that there are also other funding options that bank institutions offer, including a revolving line of credit. Be sure to inquire about these options to know which funding method applies best for your specific financial requirement.
4. Sale of the company’s ownership
You can also sell part of your company’s ownership in exchange for capital investment. Keep in mind, however, that this will modify your company’s business structure and will reduce the percentage of ownership of the current owners.
Also note that if you decide to sell an ownership stake of your company, you have to look at the by-laws and other regulatory requirements of the state in which you are located. Sometimes you can sell part of your business by just following your company’s internal rules, but sometimes you may be required to at the very least notify the state about the change of ownership.
5. Asset-based financing
Another way to secure additional funding is to make use of your existing assets and inventory. There are lenders that will give you capital investment as long as you have valuable assets to be used as collateral.
Consider this option if you have machinery and equipment that you can leverage to get additional funding. However, remember that you must still be responsible for making sure that you are able to pay back your loan. Otherwise, you will end up losing your assets, which may jeopardize the completion of a project.