Why cash runs short when work is good
A growing contractor can be profitable and still short of cash. Each new job needs labor and materials before the first pay application is approved, and retainage, commonly 5 to 10 percent of each payment, is held until completion. The more work a company wins, the more of its money sits in jobs that have not paid yet. Most financing for contractors is financing for that timing.
A line of credit for payroll between draws
A revolving line is the closest fit. It is drawn when payroll comes due and paid down when the draw arrives, and interest is charged only on what is used. Banks offer lines to contractors with two or more years of financial statements; online lenders offer smaller lines with less paperwork, at a higher cost.
Financing billed work
When a pay application has been approved but not yet paid, receivables financing advances against it. Construction receivables are harder to finance than most, because of retainage, lien rights and the chance of a dispute, so fewer funders do it. Those that do will want the contract, the pay applications and the paying party's history.
Equipment
Excavators, loaders, trucks and lifts are financed against their own value, over terms that commonly run three to seven years. Refinancing machines the company already owns outright can also release cash for working capital.
Short-term working capital
A revenue-based advance funds within days and is repaid from deposits. It costs more than a line, so it should cover a specific gap, such as mobilizing a new job, rather than serve as standing finance.
What helps a file
- Three to six months of business bank statements
- A list of current jobs with contract values, amounts billed and amounts paid
- Receivables aging, including retainage
- For larger requests, the last two years of financial statements or tax returns