Contractor financing is one of the construction industry’s biggest issues, yet it’s rarely discussed. As a business funding specialist serving the construction industry since 1999 and offering various financing options for contractors, Viva Capital can help you identify the best contractor financing options for your needs and help you kickstart your cash flow. Below, we’ll walk you through why contractors like you often face struggles, potential funding solutions, and how to choose the best one for your needs.
Why Contractors Struggle to Maintain Positive Cash Flow
The construction industry is booming. It boasts more than 753,000 employers and 7.8 employees, according to the Associated General Contractors of America. Nearly $1.8 trillion worth of structures are built each year. While this paints a positive outlook, working on the frontlines of construction is not without its challenges. All businesses struggle with cash flow – the constant ebb and flow of money. It’s this, not a lack of profit, that’s responsible for most business closures, as Forbes reports. Ordinary businesses perform work or deliver goods and typically give their clients 30 to 60 days to pay. That gap and the expenses the business must cover in the interim can create insurmountable difficulties if the business does not address its cash flow issues. In construction, there’s not just a 30 or 60-day delay. The general contractor waits weeks or months while funding the project out of their own pocket. Subcontractors grapple with the same challenges. However, most cannot afford to pay construction expenses out of their own pockets, and loans are not an option because they can result in a lien that stops progress on the project. That means general contractors often shoulder the burden for themselves and their subcontractors. Construction financing for contractors helps alleviate the cash flow gap, but all funding solutions are not the same. That’s why it’s important to know your business finances well and find a tailored solution.
Financing Solutions for Growing Construction Needs
In the world of construction, financing for contractors has emerged as an essential cornerstone, empowering many to seamlessly bridge gaps in cash flow and expedite project timelines. General contractors and specialized builders are increasingly realizing the importance of various contractor financing options. With the growing demand for home improvements, it’s become evident that home improvement contractors need tailored financing solutions. Recognizing this, finance companies and industry dealers have joined hands to offer financing solutions, from construction loans to home equity loans. These solutions cater to both expansive construction projects and specific home improvement financing for contractors. As more contractors get involved in these programs, the construction industry benefits from enhanced liquidity and flexibility.
Navigating through the financing process can be daunting. However, with the right financing solution, a contractor may efficiently secure financing, addressing their unique cash flow problems. Some contractors and dealers prioritize home improvement loans, while others focus on broader construction financing. The ability to offer your home improvement services with integrated customer financing options, especially financing for home improvement, can be a game-changer. It not only helps contractors elevate their service offerings but also enables them to show customers the benefits of immediate project commencement.
Transparently talking to your customers about available financing options and guiding them on how best they can use financing creates an atmosphere of trust. Especially when customers can apply for and secure financing directly, it simplifies their decision-making process. Whether it’s an option where customers can use a home equity advantage or a more direct contract financing route, the objective remains: to alleviate financial burdens and ensure projects remain on track. With flexible financing terms, minimized late payment penalties, and solutions that essentially act as a cash infusion, financing helps contractors transform their business trajectory and meet client expectations seamlessly.
Top 6 Contractor Financing Options
Contractor loans are the first thing that comes to mind when people think about funding. However, traditional small business loans aren’t intended for project cost financing. They’re intended for business expenses, such as adding a new business location or expanding. They’re long-term contractor finance solutions typically paid off in five to 30 years. That’s too long of a term for a single project and would likely require some form of valuable collateral. Because of this, the solutions highlighted below will focus on types of finance contractors can leverage for individual projects. In most cases, the balances can be paid off in months rather than years, though some don’t involve taking on debt.
1. Quick Pay
Contractor finance companies sometimes offer a unique form of funding called “Quick Pay.” With Quick Pay, you use an advance on project payment to provide select subcontractors with an advance. Each funding company works a bit differently. With Viva, for example, everything is managed through your online portal. You simply upload project information, associate subcontractors with it, and then choose their advance amount. You also provide final approval when your subcontractor requests funds, so you stay in control of the cash, and it’s only disbursed per your wishes. Many use this contractor financing type to pay drywallers, electricians, and other skilled tradespeople. It eliminates the guesswork of payment schedules and helps build stronger relationships, ensuring subcontractors stay on track and return for future projects. Most experienced general contractors can qualify for a program like Quick Pay because the entity paying for construction – the client – is scrutinized more than the contractor.
2. Business Credit Cards
Some contractors can use business credit cards to fund projects. This can work exceptionally well if you can pay off the balance in full each month. However, because most credit cards have interest rates of around 17 percent, it’s one of the more expensive ways to borrow cash for more than a few weeks. Many use credit cards for everyday expenses, such as materials, office supplies, and fuel. Cards often have spending limits that prevent them from being used for things like purchasing equipment or paying subcontractors, though. A typical overall business credit card limit sits a little above $50,000, per Nasdaq. Qualifying for a business credit card can be difficult. You’ll usually need to have strong credit or collateral. Your creditworthiness will also impact your interest rate and fees. So, although you may qualify for a business credit card, your rate could be considerably higher than average.
3. Lines of Credit
Lines of credit work similarly to credit cards in that your business is given a maximum draw amount. You’ll make payments on the amount you draw and can tap into the line anytime you need it as long as funds are available. Lines of credit are a more versatile form of contractor funding than credit cards are. A $100,000 limit is standard, while some allow businesses to withdraw up to $250,000, Bank of America reports. Interest rates tend to be a little lower than credit cards, too. That means a line of credit is probably more ideal for things like business expansion, though it could also be used to cover project expenses. The approval process for a business line of credit is similar to getting approved for a credit card. Your creditworthiness, revenue, business history, and more will go into the decision.
4. Equipment Financing
A variety of specialty loans for contractors are available, too. One example is equipment financing, which can be used to purchase anything from trucks to excavators and even computers for the office. The item you’re purchasing usually serves as collateral when you use equipment financing. At times, this can be helpful because it may allow your business to procure expensive equipment it couldn’t obtain any other way. However, the lender’s equipment valuation determines the funding level you’ll receive. That means if you work with a lender who doesn’t understand the value of your equipment or how it benefits your business, you aren’t likely to receive the same level of funding you would with an industry specialist, or you may not receive funding at all.
5. Trade Credit
Although trade credit doesn’t fall under the umbrella of traditional general contractor loans, it’s worth mentioning because it can help eliminate cash flow shortages. Anytime a supplier provides your business with materials and doesn’t expect an upfront payment, it’s considered trade credit. For instance, if your supply company provides you with $2,000 of sheetrock and then sends you an invoice indicating you should pay within 30 days, they’re offering you trade credit. Every supplier is a little different. Some issue trade credit with every sale, while others check your creditworthiness first. Some tack on interest after a certain period of time, provide early-payment discounts or use other methods to encourage you to pay quickly. Because trade credit is handled on a case-by-case basis, you’ll need to speak with each supplier to determine what terms they offer and how to leverage it best to improve your cash flow management.
6. Invoice Factoring
Instead of waiting for your client to pay net 30 payment terms when you hit a milestone or complete a project, an invoice factoring company can immediately advance you most of the cash. When your client pays what they owe, the factoring company then sends you the remaining balance minus a small factoring fee. This makes invoice factoring unique because there’s no debt or interest to pay back. The factoring fee varies but is usually somewhere between one and five percent of an invoice’s value. There are no specific requirements for spending your cash from factoring, so contractors use it in many different ways. For example, some leverage it to pay subcontractors, while others purchase supplies or invest in business expansion. Many use it to kickstart their next project, too. It’s much easier to qualify for factoring than other forms of funding because the creditworthiness of your clients matters more than yours. The amount you qualify for varies, too. For instance, you might start by factoring on smaller projects and receive advances of $50,000 or so, and eventually scale up to $500,000 projects. If you’re unsure about the best option for your business, comparing purchase order financing vs factoring can help you determine which solution aligns with your needs.
How to Compare the Best Contractor Financing Options
Based on the descriptions above, you may already know which funding solution is best for your situation. However, running a quick financing comparison can help if you’re still unsure.
Determine How You Plan to Spend the Money
Some contractor financing solutions, like equipment financing, can only help if you need to purchase equipment, while other options, like factoring, are versatile.
Consider the Costs
Unless you’re borrowing from friends and family, there is always some cost involved in obtaining funding. Consider things like interest rates and additional fees over the loan’s lifetime. Again, an option like a business credit card may seem ideal if you can immediately pay the balance off. However, most businesses carry a balance from month to month and often only pay the interest. In this case, it not only becomes one of the most expensive ways to borrow but can bury your business in debt and prevent you from obtaining more cost-effective funding in the future.
Know How Much Cash You’ll Need
Each contractor financing solution has a ceiling. Be realistic about how much cash you’ll need throughout the project and plan accordingly. A miscalculation can leave you with additional gaps that have you turning to more expensive options later.
Consider the Speed of Funding
Options like Quick Pay and invoice factoring can provide you with cash instantly. Others, such as lines of credit and equipment loans, may take longer to set up and payout.
Explore Additional Value Each Financier Brings
Earlier, we touched on how it’s essential to have an industry specialist help you with an equipment loan because the company will understand the value of your equipment better. For this reason, it’s always a good idea to work with an industry specialist regardless of your funding choice. Additionally, it’s worth exploring any additional perks a company offers. For instance, some companies, like Viva, offer various contractor financing programs, so it’s easy to find the right solution regardless of your stage of growth and needs. We also make managing your account easy with online portals and perform client credit checks for you. In this sense, we’re not just another contractor financing company. We become a partner with the businesses we serve.
Request a Free Funding Quote
If you’re a contractor in need of funding to pay subcontractors, purchase materials, expand, or cover other expenses, Viva’s tailored funding solutions can help. Connect with us for a complimentary rate quote.
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