In the construction industry, it’s important to utilize multiple funding sources to build a strong cash flow. Companies must maintain a steady cash flow in their business. Otherwise, they won’t be able to take in more projects and miss out on big sales. In this article, we are going to discuss four lending options that can help you build better cash flow for your construction firm.
Related: Equipment Financing for Contractors
With any lending product or program, it’s important to discuss your options with a financial professional. You’ll want to consider things like the length, terms, needs for the cash, along with the options available to you. In the following report, we’ll discuss Equipment Financing, Invoice Factoring, Lines of Credit, and Multi-Year Term Loans.
Equipment financing refers to either an equipment lease or an equipment loan to cover the purchases of used or new equipment. The biggest benefit of equipment financing for your construction company is that it frees up cash that you can spend elsewhere. Instead of making big purchases outright for new equipment, you can use equipment financing to make your large construction purchases.
An equipment lease works like a rental. Your construction firm makes payments to the equipment financing company to use the equipment you need. At the end of the leasing term, your construction business can end the lease and stop making payments, extend the lease and keep making payments, or purchase the equipment outright from the financing company.
An equipment loan is a lump sum term loan that comes with a restriction that dictates the borrowed funds must be used only to purchase new or used equipment. Much like an automobile lease, your construction firm can make payments over the extended term of the lease rather than making one large purchase upfront.
Invoice factoring refers to the process of selling accounts receivables to a factoring company. Construction companies usually extend payment terms for invoices to maintain satisfaction for their clients. Although that move is risky, it’s often necessary. As a result, many of them may experience cash flow gaps. This then calls for the need to acquire cash in the quickest way possible, which compels them to apply for invoice factoring.
In this arrangement, the companies can cash out as much as 85% of the total of the invoices they sell. The factoring company then handles the entire ledger and takes full responsibility for payment chasing. Once the customers pay, the factors deduct the loan payment plus the associated transaction fees.
On the upside, the businesses that apply for invoice financing don’t have to worry about facing cash flow issues. However, merchants must make sure that their customers have good credit standing.
Lines of Credit
Business lines of credit work like a credit card, but with cash that your construction company can withdraw. This financing option is great for construction companies because there are no restrictions. This means that the line of credit can be used for inventory, equipment, payroll, or any other operating expense. Basically, you can do whatever you want the money – as long as it benefits your business.
A business line of credit is a revolving cash line. As you make payments on the balance owed, the amount available to you goes back up. If the need arises again, you can withdraw cash anytime you want. This makes a line of credit an excellent source of funds for your construction firm. As long as you maintain your payments, the line of credit is yours to use, when and where you need it.
Multi-Year Term Loans
A final option for construction firms that improves cash flow is a multi-year term loan. These short-term loans offer small business owners flexibility as well as an opportunity to consolidate debt, capitalize on growth opportunities, make equipment purchases, or meet a sudden business expense. There are no restrictions on multi-year term loans. It amortizes over several years and contractors are provided with low repayment and interest rates. The loan repayment period can last around 2-5 years, depending on the terms you and the lender have agreed to.
The benefits multi-year term loans are endless. It provides flexibility for businesses at low-interest rates. Aside from that, there’s also limited documentation needed to apply. The approval process takes around a few weeks which is important for businesses needing quick financing for certain investments.
The Bottom Line
Loans are important in the construction industry. Given that the cost per project can go up to millions, at a time, they need all the financing they can get to fund their business. Moreover, with the late invoice repayments, companies often experience cash flow issues.
At times, they may need to apply for all these loans at once. Equipment financing for the machines and tools they need for construction; multi-year loans to add to the working capital; and invoice factoring to cover temporary cash flow gaps. Be sure to know what you’ll need the loan for before applying for these financing options.