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Considering Credit to Finance Business Growth in the Construction Industry

Posted by Concannon Miller on Thu, Oct 17, 2019

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Considering Credit to Finance Business Growth in the Construction IndustryIf you find your construction company gaining a large influx of projects, the biggest problem will be the boost in the amount of capital you will need in comparison with your cash flow.

A jump in new jobs can strain your firm's resources, challenging the firm's capacity to hire field crews, its technology infrastructure and its cash flow. The upside, of course, is that a large backlog of incoming projects means more income and a lead time that lets your management team meet increasing cash flow demands. The more backlog of construction-in-progress the more big payrolls, more benefits going out, larger materials bill. And of course, everyone wants to be paid in cash.

This demand for cash can make it hard to ramp up to meet growth opportunities, but you can effectively manage it by using existing credit efficiently and taking out new strategic lines of credit.

Wary of Financing Costs

New Call-to-actionThe capacity of credit lines and credit cards often isn't being used to its fullest by many construction firms. Many executives avoid using credit because they are wary about interest and financing costs. This is understandable. Credit card annual percentage rates are high and debt can quickly become problematic if left unchecked.

Nevertheless, there are financing companies that work with groups of banks and specialize in obtaining credit for small-to mid-sized companies. They are often a good choice, although they charge relatively high fees, because those charges are often offset by the lower, promotional interest rates they can acquire for you and the larger credit capacity they are often able to procure.

READ MORE: Cash Management & Obtaining Financing: What Every Company Should Know

The cash flow obstacle to serious revenue growth can lead you to the logical first important step in using credit effectively -- determining which costs or expenses must be paid only in cash. For example, payroll obviously needs to be paid only in cash. But many expenses typically thought of as cash payments can be paid with credit cards or disbursements from credit lines.

The nature of construction projects is that they break even for cash flows after a relatively short time. Capital outlays such as initial material drops, insurance payments, vehicle lease payments, and office bills pile up long before the first draw comes in from the general contractor or the owner.

Break-Even Point

Project cash outflows continue to outweigh inflows until that break-even point. A break-even analysis is helpful in determining how much credit you will need until a project reaches the point where it brings in enough cash to pay for itself.

Once all the cash-only disbursements have been identified, which are primarily payroll and payroll-related costs, all other job and office expenses should be paid for by credit until cash receipts are sufficient to sustain expenditures.

Credit card payments aren't typically the preferred method for vendors because they have to pay transaction fees or they don't have a merchant account. Nevertheless, many of them can be convinced that accepting credit cards is preferable to having to wait for payment, possibly for a long time.

READ MORE: Construction: Improve Cash Flow with the Critical Path Method

If some vendors still will not accept credit cards, you can still use the cards by paying them with a cash advance. Although the fees are significant, they are manageable when you take into account the large backlog of contracts.

One contractor went from $100,000 in revenue one year to $11 million in revenue the next. The two choices to finance such massive growth were either for the chief executive to pay for everything in cash out of his own pocket or use credit to finance the growth.

Request for our Construction Tax Team to produce a break-even analysis on your current projects and to train your bookkeeping and accounting staff on how to produce these analyses. We can also give you tips on the controlled use of credit to finance revenue growth. Contact us here for further assistance. 

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Topics: Construction & Real Estate Development

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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