Construction is certainly a risky business. With things going array in a second because of an unknown structural defect or delayed payments from clients, one needs to keep their heads clear and think of ways on how to get the business moving and the project completed.
When you can’t meet your financial obligations, like paying suppliers and your staff because of a shortage of funding, you would have to be more creative to cope with the lack of cash. There are outfits and out of the box methods that you can get additional money for your construction business such as revenue based loan. Let’s talk this through.
How Can I Have Extra Money For My Construction Project?
Most business owners are getting battered in their first few years especially when you are engaged in the construction industry. It is a super dynamic arena that you can lose your shirt over. From the permits, suppliers, crew, and getting the project up to code, your investment or your investor’s money can easily get eaten up.
When you don’t have enough money to continue the hammering and the nailing, here are your options.
Invoice Financing/Factoring
Invoice financing is a creative way to ensure that you are up to date with your payment obligations to everybody you owe money to. This is construction finance where you borrow money against the unpaid invoices of your clients with interest. Basically, you are using your income in advance. It would help you improve your cash flow, meet your obligations, and invest your money wisely.
But you have to be very meticulous in your accounting because you can easily borrow more money than you are entitled to be paid. Plus, take note that it has an interest. When you borrow too much from invoice financing, your profit might just be lost due to the interest you have to pay off.
Equipment Leasing
Another innovative way of getting that extra cash to supplement your construction projects is leasing some of your equipment to other contractors who need it. Since heavy machinery like a tower crane will not be used all throughout the project duration, you can lend it to someone for a specified period of time in exchange for periodic payments.
A risk that you have to keep in mind as a lessor is that the equipment may be misused by the lessee that the equipment is rendered inoperable after the lease duration. To prevent this from happening, you can add in penalty clauses for specific clear misuse circumstances in the contract. You can draft a sample contract online and tweak it to reflect all the terms and conditions that you want to be included in the leasing agreement.
Business Line of Credit
This works like your emergency stash or open banking but with interest. Line of credit loans you a set amount of money that you can use when you need it. You don’t need to use it all up in one go. And the good part is you only pay interest on the money you borrowed and the interest starts when you use the loan.
Line of credit should be set up ahead of time before things go bonkers so that you would have time to give all the requirements needed to the bank or finance institution where you want to avail a line of credit.
You would need to present collateral if you want to apply for a secured line of credit. Of course, you can also seek credit without needing to pledge specific assets but your business needs to have a good track record and strong credit profile. Also, unsecured lines of credit have usually higher interest rates and offer smaller loan amounts.
Short Term Loans
Short term loans are often used by small businesses to raise working capital to cover money deficits for inventory, payroll, and other expenses.
Just like a business line of credit, you would need to guarantee your repayment through an asset or some form of collateral to get approved. Interest rates for short-term loans are usually lower than long-term ones but the tables can be quickly turned when the economy is in recession.
Short term loans are usually repaid in 30 days up to a year depending on the amount and the terms of the lender. This is quite enough time for construction projects to make the money and settle the loaned money.
Merchant Cash Advance
A quick way to earn the cash you need for the rainy days is availing of a merchant cash advance. A merchant cash advance is a lump-sum payment in exchange for future revenue.
This type of business financing is discouraged by business finance experts because of the high risks it puts small businesses into. They can get bankrupt easily because of how the contract and staggering interests on your loaned money.
Lenders that offer merchant cash advance use a “factor rate” that is fairly simple to understand. Your initial loaned amount is multiplied to a factor rate ranging from 1.1 to 1.5, and you get the total amount for repayment. However, if you compare it to APR, the interest rate on your borrowed money will be converted up to 200% APR. A shocking rate that would surely shake any small business owner.
So beware of availing of a merchant cash advance. Only use this highway when you are in desperate need of cash and that you can repay the amount within the terms or even earlier.
There are of course other means on how to finance your obligations in your construction business but just like any transaction, there are risks involved in loaning money. Before you decide on the type of financing you would want to use, be sure that you understand all there is to comprehend about that type of loan. It would also not hurt to research a bit about your options and take your pick on what option you are comfortable with. Losing your shirt over your business is not necessary but can happen if you are not careful in dealing with your finances.