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Setup a Construction Firm Debt Management Plan for Significant Savings

Posted by Concannon Miller on Thu, Dec 10, 2020

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Setup a Construction Firm Debt Management Plan for Significant SavingsCreating a formal debt management plan for your construction company will save you thousands or even tens of thousands of dollars in interest, over haphazard borrowing.

Following certain best practices and using a structured approach to your company's debt plan is part of an effective construction finance, accounting and tax strategy.

Look at Current Debt, You May Be Surprised

First, create a table like the one below listing all your current debt, including working capital lines of credit, loans of any kind, any interest bearing notes or other financial obligations. Do not include Accounts Payable.

Debt Management Snapshot as of December 20th of the Current Year

Debt Source

Current Balance

Interest Rate


Term Loan With Bank Number One




Loan From Ed Simmons




Major Supply House Credit Card




Working Capital Line of Credit




Restructuring Loan, Prior Business




If you look squarely at the rates of interest you are paying on your different notes, credit cards, and loans -- and then rate them according to market interest benchmarks, you will always see room for improvement.

Consult with your CPA to verify the market rates of interest on your different debt instruments. Knowing what you should be paying as a standard rate of interest will help you start your debt management plan.

READ MORE: Construction Bookkeepers: Tips for Producing Quality Financial Statements

The High Cost of Working Cap Utilization

New Call-to-actionOne of the most common debt instruments construction firms use is the working capital revolving line of credit. The biggest mistake small construction firms make is to utilize most of the line of credit right away-- and then keep the utilization high.

Think of it this way. A term loan usually starts with a high balance, and then as your firm makes its payments of principal and interest the loan balance goes down, so interest is steadily being charged on less and less of a loan balance as time passes.

With working capital lines of credit, however, when high balances are maintained continually (in the false belief that this provides better access to cash), this is the same as paying interest on a high balance loan that never goes down-- never gets paid off -- and never goes away.

Structured Debt: A Better Way

All borrowing is more efficient (with less cost of interest) when the use of funds and payment terms are predetermined. For example, planning your use of debt is important if your firm has wide access to many forms of loans and borrowing. This is true because debt may be too freely used by those who are not responsible enough to make solid debt issuance decisions.

On the other hand, if your firm is hard pressed to get loans and is awarded one, staying true to its purpose ensures that the borrowed funds will actually be used for that purpose, and the loan money is not squandered.

READ MORE: Time to Upgrade Your Construction Accounting Software? What to Consider

How to Structure Your Firm's Debt

Debt should be structured in both use and payback. When you take out a mortgage, you borrow a certain sum of money and all of the money gets used to buy a specific piece of real estate property. All debt should be used in this purpose-driven manner. Working capital lines of credit are not the only debt instruments which are too sloppily used. Credit cards are also used here, there, and everywhere and credit card balances are rarely managed as tightly as they should be in smaller firms.

A better alternative is to plan usage of debt instruments more carefully. Give credit cards to project managers for use only on particular projects, or with particular vendors who don't offer credit terms, or only for gas charges. Defy the perception that credit is a "bottomless pit," by telling cardholders they have to justify why they would use credit over other more conventional terms of payment.

The reason you want to limit the careless use of credit is because vendors that extend you credit don't charge interest. Gas stations that take cash for fuel don't charge you interest. Cash-on-delivery (COD) material drops don't accumulate interest charges.

Is a credit card or working capital draw so attractive that it's worth cutting a chunk of your capital for the convenience? A project manager who is rushed may make the split-second decision to use his merchant credit card to charge $2,000 in materials, even though he knows you have a house account. It's quicker, the card was right there in his wallet, and besides, he wasn't sure how much house credit was available. Easier, yes. More convenient, yes. But whose convenience are you feeding?

Save on Interest

An experienced CPA can you help you structure a formal debt management plan for your company, saving you a great deal in interest. Please contact our construction team to schedule a consultation.

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© 2020

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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