Financing Your Growth

After years of working with construction businesses, I’ve seen many a firm struggle with finding the right financing to handle cash flow ups and downs, equipment procurement, and growing pains. The process can be tedious at best, but there are several factors that determine whether or not you’ll have a positive outcome.

Regardless of who you are trying to get financing from, you need to start by ensuring you have your internal finance ducks in a row.  Most will require a personal financial statement in addition to a business statement and several years of tax returns to start. Depending on what you need the money for and how much, you may be required to show detailed cash flow, A/P, and A/R reports.  You can produce these internally or have your CPA create them for you.

Outside of private equity and venture capital dollars – there are 4 basic ways construction firms get financing:  Bank Loan/Line of Credit, Equipment Financing/Lease, SBA (Small Business Administration) loan and factoring by leveraging your receivables.

1. Bank Loan/Line of Credit.  I can’t emphasize enough the power of having a personal relationship with your local bank.  Small community banks WANT to lend money and are out there looking for good businesses to lend that money to.  Be it a bank loan with a fixed amount given all at once or a variable line of credit where the borrower only pays on what is pulled from that credit line – working with a community bank is a big win.  Most community banks don’t have “Black Box Underwriting” – they tend to look at each borrower’s unique situation versus tossing numbers into an algorithm and saying yea or nay based on the outcome.  The process may be long, but once you’ve proven yourself as a good risk you’ll find working with your local banker to be a great experience.
2. Equipment Loans and Leases.  As the equipment acts as collateral, you’ll find a myriad of options out there for buying or leasing tools & equipment.  You can go through the vendor, but don’t hesitate to work with your local bank/credit union.  You can even try to negotiate the rates and terms with the lender.  If your credit is less than stellar it may be easier and more cost-effective to lease the equipment versus buying – but you need to also look at the long-term financial impact.  How long will you need the equipment, what is the overall ROI on lease versus buy? Is having the latest and greatest version important – if so, leasing makes for an easier upgrade.  The bottom line is there are a lot of factors that go into the decision – factors that should not be taken lightly.
3. Small Business Administration – SBA backed loans.  The SBA doesn’t make loans they guarantee them through various lenders across the country.  The process to secure the varied loan options can be quite long and often tedious, but the rates and payback terms are incredibly favorable for your firm.  What’s great about SBA is their support – they will work 1:1 with you to decide what you need and hold your hand through the process.  SBA may refer you to affiliate agencies such as SCORE or SBDC to help you get your finances in order before they start the lending process.  They also have specific programs for women-owned, Native American owned, veteran-owned and LGBTQ owned businesses for those who qualify.
4. Leveraging your Receivables with Factoring.  If you are in a tough position and can’t get traditional funding, working with a Factoring firm to leverage your receivables may be an option to float the cash.  If your vendors are on a 15-30 net pay schedule yet your customers are 60-90 day payers and you don’t have cash reserves – this is a recipe for financial disaster.  When working with a Factor – you borrow against your invoices, but it comes at a hefty cost of 20-30%.  It’s a stopgap not a long-term solution for tight cash flow.

My advice is always to start with building a relationship with your local banker and take advantage of everything the SBA, SCORE and Small Business Development Councils have to offer to help you navigate the myriad of financing avenues available to you.