Subcontractors often encounter difficulties obtaining funding from traditional financial institutions, which prefer to deal with larger businesses. However, they still have to pay rent and employee wages as well as purchase equipment, vehicles, and supplies. Here are some methods of financing a construction business through nontraditional means.
Use Personal Resources
Many construction business owners self-fund their companies. They utilize credit cards, take out mortgages on their properties, or drain their savings or retirement plans. This approach is risky, however, as many startups experience failure in the first or second year.
Approach Family and Friends
You may be able to persuade family and friends to invest in your construction business. You should be aware, though, that if the company does poorly, this may negatively impact your relationships.
Apply for an SBA Loan Program
The U.S. Small Business Administration has several programs of interest to construction subcontractors, although the SBA does not directly supply funding but instead guarantees loans issued through banks. If you need less than $50,000, you can apply to the SBA Microloan Program, and if you need more, you can try the 7(a) Loan Program.
Ask Suppliers for Payment Terms
If you have problems coming up with payments to your suppliers, look into supplier financing. A finance company covers the payment, and then you reimburse the finance company over time while your cash flow remains strong.
Balance Your Payments
As an alternative to supplier financing, balance your incoming and outgoing payments to avoid problems with cash flow. Encourage your clients to promptly pay their bills by offering discounts for early payments. At the same time, request payment terms of 30 to 60 days from suppliers.
Factoring your accounts receivable involves sending them to a finance company. You immediately receive an advance of 70 to 80 percent of their value, and you receive the rest, minus a fee when your clients pay in full. You can offer terms to your clients but still, keep your cash flow strong.
Obtain a Merchant Cash Advance
A merchant cash advance allows you to obtain an immediate loan in exchange for future profits. These loans are expensive, though, so before you obtain one, calculate its efficacy for your business.
For more advice on financing your construction business, contact Point High Finance.