It’s said that you have to spend money to make money, and in construction, that’s true. To take on a large project, you need to be able to pay for labor, materials, and overhead — many times, all upfront. And that’s exactly the challenge: Companies don’t always have the cash available to pay for those things until they’re paid for the project, often 85 days (on average) after they’ve started the work.
That’s why contractor financing is essential for construction firms. For many companies, financing is key to taking on more and larger projects, and ultimately, growing their business. Specifically, contractor financing allows companies to purchase materials and labor upfront, and pay for them later, after they’ve received payment for work they’ve performed. Through this method of debt, construction companies can do more with less, and ultimately, exponentially grow their business.
Improved Cash Flow
In the construction industry, there are a number of companies and individuals involved in every project, from the project owner to general contractors to subcontractors. If any one participant experiences a delayed payment, the consequences typically extend to the other parties. According to Levelset, it takes an average of 83 days for a contractor to get paid from the date they start work.
Those delays and cash flow issues can limit a contractor’s ability to take on additional projects.
Construction financing, however, can bridge that gap and allow contractors to take on projects they may otherwise have to turn down, or worse, accept and have trouble getting started.
To illustrate the impact financing can make, consider the following example: Let’s say you are awarded a project, but first need to understand how much upfront cash you need to get started.
Project Contract Value: $500,000
Project length: 4 months
Materials: 40% ($200,000)
Labor: 30% ($150,000)
Overhead: 15% ($75,000)
Target Profit: 15%
Example Without Financing:
While your company likely won’t start getting paid for the project for 85 days (industry average) from when you start the work, you will need to begin paying for material, labor, and overhead costs either immediately or within 30 days of starting work.
That means during month 1 and 2, you’ll need enough cash to cover your expenses. In the third month, you’ll receive the first portion of your payment (for the work you did in the first month), but even that won’t be enough to produce a positive cash flow.
Increased Ability to Take On (and Successfully Complete) Larger Projects
The examples above show the decrease in cash needed to take on projects with and without financing. Contractor financing gives you the opportunity to take on more projects at once. Rather than taking on one $500,000 project for $212,500, like in the example above, you could take on 4 of those projects for basically the same amount of cash by using material and labor financing.
Example: In our example above, you needed $212,500 to take on 1 project worth $500,000 with financing. You only needed $42,750 with financing. If you had $212,500, you can take on FOUR more of those exact projects (42,750 x 4 = $171,000) at the same time.
Leveraging Contractor Financing In Your Business
With contractor financing, you can free up the cash you need to purchase the necessary resources for your projects, including:
- Materials: Larger projects typically require more materials. With material purchase financing, you get the materials now to start the project, but delay paying for them until you get paid.
- New or more equipment: A new piece of equipment may enable you to complete a larger job at a faster rate — but only if you have the capital to purchase that piece of equipment. With contractor financing, you can make large purchases like this without having to use your available cash.
- Additional labor: Larger projects may require additional labor or workers with specialized skills. Financing can give you the flexibility you need to hire the people who can help you successfully complete the project. Labor financing will usually come in the form of a contractor line of credit.
Financing shouldn’t be seen as a liability, but rather, as an opportunity to grow your business. With contractor financing, you can confidently take on bigger — and often, more — projects, without worrying about needing vast amounts of cash upfront.
To calculate the benefits for yourself, check out Billd’s cash flow for contractors tool. With just a few clicks, see how much cash you need to get started on a project, with material purchase financing versus without it.
At Billd, we help companies better operate and grow their businesses. Through our new payment solution for buying materials, suppliers receive upfront payments, while contractors enjoy 120 days to pay, so you can avoid cash flow problems and amplify your business’s growth. Contact us to learn more.