Working Capital Financing
For various reasons, which we will review in this article, the Construction industry serves as a great example for best practice when it comes to utilizing working capital financing as part of the basic economics of the Construction business. By understanding how working capital financing is used by construction business owners, you can learn more about working capital financing, who is it for and how it can be used to help grow faster and mitigate risk in your own business.
As an owner of a construction business, there are many situations where you might need working capital financing.
What is working capital?
Essentially, “working capital” is the amount of liquid assets you have available to handle day-to-day expenses—and almost every entrepreneur experiences a time when that capital just isn’t enough to cover them. Construction and contracting businesses are unique in that they usually require a significant outlay of cash at each stage of each job, requiring a substantial amount of working capital in the bank.
No matter how successful your construction business, you may need working capital financing in situations like these:
- Big work orders: You receive a big new job or large work order from an important client, but won’t be paid until the job is complete. However, you need working capital to buy the building materials or equipment to fulfill the order.
- Expansion and growth: You’re planning to expand your construction business. Whether you are hiring additional employees, expanding to a new geographic or demographic market, or moving to a bigger physical location, business growth requires additional working capital.
- Seasonal slumps: Winter time hits! Depending on your location, the construction business can be highly seasonal.
- Slow payments: Clients are slow to pay their invoices. If a big client is slow to pay or you face unexpected delays in processing invoices, working capital financing can help get you over the hump until you get paid and your cash flow is back to normal.
Where to Get Working Capital Financing for Your Construction Company
You have many options for working capital financing to improve cash flow for your construction business. Here are some to consider.
When most people think of business financing, they think of term loans. These loans are made for a specific period of time or “term”—hence the name. You can choose from short-term loans, which typically require repayment within 18 months, or longer-term loans, which may have repayment periods of up to 10 years.
Term loans are useful if you require a substantial amount of working capital financing, but they can be difficult to obtain. Term loans require a thorough application, including a review of your personal credit score, your business credit history, business and personal tax returns and more.
Line of credit
If you’ve ever gotten a home equity line of credit on your house, you’re familiar with the concept of a line of credit. A business line of credit works the same way: The lender approves you for a certain amount of credit, which you can draw upon when you need it. You don’t incur interest charges or need to make payments until you actually draw from the credit line.
A business line of credit is a very attractive and flexible solution for working capital financing needs. However, banks may see the construction industry as “risky” and are often hesitant to extend lines of credit to construction businesses.
Credit card financing
Depending on the limits of your business credit cards and the amount of working capital you need, a business credit card can be an easy solution to your problems. If you already have the card, there’s no need to apply for anything, and you can pay off the balance in amounts that work for you.
Of course, the downside is high interest rates and the possibility of additional fees (and damage to your credit rating) if you miss a payment. Since construction jobs require you to pay suppliers and vendors before getting paid yourself, you’ll want to make sure the timing works out. You will want to pay off your cards before incurring large financing charges.
In this type of working capital financing, a lender gives you an advance on your outstanding invoices so you don’t have to wait for customers to pay you. This solves the problem of slow-paying clients.
Invoice financing is similar to invoice factoring, but there are some important differences. For instance, if you use Fundbox’s invoice financing services, you receive 100% of the amount of your invoices, while factoring companies typically advance just a percentage of your invoice amount.
Fundbox won’t interfere in your relationship with your clients, so they’ll never know you’re using a financing solution.
With Fundbox, you get your money immediately (typically as soon as the next business day), and repay the advance over a 12-week or 24-week period—your choice. You can even pay it back early without any penalties if you want to. There’s no complicated application to complete—just sign up for a free Fundbox account and connect your accounting software. Once you’re approved, just choose the invoices you want to advance, and you’re all set.