The construction industry is capital intensive, where heavy duty capital equipment is used more than what is found in most other industries. The operation, maintenance and servicing of such equipment is expensive while repair of damages as well as replacements due to serious damages can be very expensive. Apparently, you need to have ready cash in your hands to sustain such capital equipment in addition to paying wages on time to the employees. The problem is that cash flow in the construction industry moves in a phased manner as it is mostly contractual, i.e. tied to completion of different phases of the project. Contractors find it very difficult to get direct lenders funding to manage their cash flow better.
Cash flow constraints hampering growth
In order to grow at a steady pace in the construction industry, contractors need cash in hand because every new project means new investments in men, material and equipment. The payments for completed projects arrive in a phased manner and can range anywhere between 60 and 120 days.
Even if you have a good order book, it will be near impossible to move on to your next project without cash in hand. You have exhausted your cash reserves in the project that you just completed and traditional business funding isn’t available to you as your cash flows do not meet the criteria for such funds.
Funding options for contractors
You could apply for Small Business Administration (SBA) loans but such loans are not ideal for bridging short term cash flow gaps caused by the structured stage payments that you receive. The other options are to look up marketplace lenders. engineerontheroad
This is unsecured small business funding and could suit your needs once in a while but in the long run it is not really helpful. Merchant cash advances are also another form of unsecured funding with higher interest rates but like marketplace loans, they are not ideal for sustained long term borrowing. lifesay
Direct funding through invoice factoring
You can leverage your unpaid invoices to secure direct funding and do so at a reasonable cost. That is because it is a kind of secured funding wherein your invoice is considered an asset. If you have a good order book, you can use this short term loan to move on to your next project and easily make the necessary investments.
Around 30% of construction businesses use invoice funding and the numbers are growing steadily. Direct Lenders Funding provides seamless invoice factoring loans to contractors and is a leading name in the United States, offering this kind of credit. It’s easy to see that contractors find such funding very convenient.
Most of the US business funding for construction industry contractors comes from direct lenders that provide them unsecured as well as secured invoice funds. Depending on how well you service your debt as well as the strength of your order book, these lenders can offer longer term benefits for invoice funding like, a consistent rate of interest. Hence, for all future invoice funding, you won’t be required to renegotiate the interest rates.