For construction and landscaping companies, business typically heats up during the summer. While this is undoubtedly positive for those businesses, the busiest time of the year can present unique cash flow challenges for them.
If you operate a construction company, for example, you might have funds tied up in supplies and building materials. That can make it harder to pay for other vital expenses—like payroll, utilities, gasoline, insurance, and more. You might also have to pay contractors and subcontractors before your customers settle their bills. Then, there’s always the risk that a job runs over budget, leaving you with a skinnier profit margin than you planned.
Landscaping companies run into similar problems. With more lawns to mow and more gardens to maintain, you might decide to buy or lease more equipment—tying up cash along the way. Customers might not always pay their invoices on time either, creating additional financial challenges.
Trade credit: The $3.1 trillion question
One primary reason that construction and landscaping companies—along with businesses in virtually all other industries—run into cash flow problems is that they deal in trade credit. Trade credit—also called “net terms”—refers to the conventional method of financing transactions between sellers and buyers.
Here’s how trade credit works: A seller might pay upfront for inventory, services, or supplies to a buyer, giving them 30, 60, 90, or even 120 days to pay their bills. A landscaping subcontractor, for example, might invoice their clients at the end of the month and then give them 30 days to pay from there. On the flip side, a construction company might use trade credit to get building materials, tools, roofing supplies, and more from a supplier and have 60 days before payment is due.
Generally speaking, sellers—who would no doubt like to be paid immediately on every sale—grudgingly accept trade credit because it’s the standard. Without offering it, it’s nearly impossible to compete. At the same time, buyers typically like the arrangement because they’re able to purchase more than they otherwise could, which helps them grow their businesses.
However, according to new research from PYMNTS and Fundbox, trade credit has severe, often damaging financial implications for U.S. businesses.
On any given day, the PYMNTS survey found, U.S. companies are collectively owed $3.1 trillion in unpaid invoices, making it that much harder for them to run their businesses. Making matters worse, when merchants extend trade credit, they still can’t plan to get paid on time. Some customers will typically pay even later than the agreed-to terms. Many of them expect to able to pay late—because they consider themselves to be such good customers. For years, this has been the norm, especially in B2B transactions and certain trades, like construction or landscaping.
What’s wrong with traditional trade credit arrangements
Trade credit essentially makes the companies that extend it assume the role of a bank for their clients—but without the upside (like the interest that accrues immediately). Even if every single client pays on time, there are still massive administrative implications to consider. For example, reviewing applications for trade credit, approving those applications, setting up new customers with accounts or terms, making sure invoices are sent on time, keeping track of who owes what, and staying on top of when payments are due are all time-consuming back-office tasks.
Suffice it to say that, in the age of automation, the current set up leaves a lot to be desired.
What’s more, while receivables might look beautiful on the balance sheet, you can’t exactly use those funds to grow a business. Managing day-to-day operations while waiting for funds to arrive can be needlessly stressful and challenging.
As for pursuing new opportunities or investing in new initiatives? That’s often out of the question, too, without a comfortable sum in the bank.
The good news is that no matter which side of the transaction you’re on, your construction or landscaping business can take advantage of innovative new solutions offered by fintech companies. Technology is rapidly expanding opportunities for businesses to get access to the funds they need to grow their companies without the downsides that come with traditional trade credit arrangements.
For example, Fundbox can help you access liquid capital through a business line of credit that can even allow you to draw upon your outstanding invoices.