NEWS

September 17, 2018

Drop a hammer off a high-rise and the impact could be deadly. Stretch a subcontractor out too long on payments and it could have a similarly devastating effect.

According to a recent survey by TSheets, more than a third of construction contractors experience cash problems at least once a month. That’s not surprising considering a 2018 study of working capital by PriceWaterhouseCoopers found that half of construction subcontractors are waiting 84 days or more to get paid – the longest wait of any industry measured.

 

Peter and Paul

The longer it takes for a business to convert capital to cash, the greater the risk of that business being unable to cover expenses or accept new work. If that happens too often, it could lead to work stoppages and even business failure. The smaller the company, the more difficult it can be for them to meet their financial obligations, given the prevalence of unfavorable contract terms such as “pay when paid,” and “pay if paid.”

Such practices evolved for a very good reason — to protect general contractors, who are often also highly leveraged and are stuck between subs with their hands out and owners holding tight to their purse strings. Nevertheless, this tradition of robbing Peter to pay Paul really only kicks the can of payment risk down to those most desperately in need of immediate cash.

Financial “experts” recommend that small businesses keep three to six months of cash expenses in reserve to cover payment delays. But as they say in the real world, “results may vary.” According to a recent report from JP Morgan, the median cash reserve for a construction contractor is 20 days — which may explain why U.S. Census statistics show construction companies have the highest failure rate of any industry with only about a third surviving five years.

 

The Subcontractor’s Dilemma             

Loans are an excellent source of cash for capital investments that allow companies to increase revenue and spread the expense over time. They are also a good way to cover cash timing needs when there is a clear and predictable income stream available for repayment.

Neither of those scenarios apply to construction subcontractors, who are often in the unenviable position of being the unstable middle, sandwiched between a large and creditworthy GC and a similarly large supplier.

Unfortunately, while banks may be reluctant to provide subcontractors with traditional business loans, they don’t seem to have any problem allowing business owners to run up large balances on high-interest credit cards — especially merchant cards, which often carry interest rates of 25 percent or more. And if a business fails, credit card debt typically becomes the personal responsibility of the cardholder.

 

Why GCs Should Care

When subcontractors fail, GCs have to scramble to replace them. That’s not always easy, especially in a booming market. Subcontractor turnover adds a whole new set of potential challenges, including project delays.

On the other hand, when subs aren’t desperate for cash, there are benefits for GCs as well:

 

  1. When subs aren’t worried about how they’re going to pay their suppliers or sub-subs, they can spend more time focused on the project and timeline.
  2. Quick pay enhances trust and creates a healthier environment, strengthening relationships between GCs and subs.
  3. Faster cash stabilizes supply chain by eliminating “kick the can” effect of cash shortages rolling downhill and contributing to business failure statistics.

 

A Better Way

In response to this set of challenges, a growing number of general contractors are applying technology and third-party funding to accelerate payments to subcontractors through a process known as “supply chain financing.”

Supply chain financing, which is already widely used in manufacturing, has only recently begun to get a foothold in construction. Turner Construction was among the first large general contractors to adopt such a program, launching its Accelerated Payment Program in 2014. Alston and KAST offer similar programs.

Unlike traditional small-business lending, which relies on the creditworthiness of the subcontractor, accelerated payment programs leverage the credit of the owner and general contractor.

Here’s how it works at TBS Capital Funding:

  • A GC works out a deal with an investor to purchase payment applications (pay apps) submitted by subcontractors for completed work.
  • The Investor immediately pays subcontractors, minus a nominal convenience fee.
  • On pay day, when the pay app would normally come due, the GC pays investor instead of the subcontractor, who has already received an accelerated payment.

In this scenario the subcontractor gets vastly improved cash flow, the GC mitigates the risk of the subcontractor failing, and the investor is able to make a low-risk investment, based on the creditworthiness of the GC and the project owner. Even better, the subcontractor can turn accelerated payment feature on and off according to cash needs.

And, unlike a traditional bank loan, where each subcontractor would have to submit financial statements and go through a lengthy approval process when a GC offers accelerated payment, subcontractors simply need to opt-in to participate. And getting cash can be as simple as clicking a button on a mobile phone app.

 

Peace of Mind

Construction should be a rewarding business, with skilled trade workers coming together under the direction of a GC to help bring owners’ dreams to life. Anything that interferes with that goal is friction that should be eliminated.

Supply chain financing through third-party funders, such as TBS, is a process improvement that benefits subcontractors, GCs and owners alike by providing peace of mind and mitigating the risk of work stoppages due to subcontractor financial stress.

Although relatively new to construction, supply chain financing is a proven practice and I predict it will become a best-practice for construction businesses over the next decade. With competition for skilled trades on the rise, GCs should be doing everything they can to attract and sustain a stable base of subs. A technology-enabled supply chain financing program to help subs better manage their cash flow is a giant step in the right direction.

Mae West once famously said, "I speak two languages, Body and English." Turns out, she was onto something. Researchers at Stanford University have found that a person's non-verbal cues can predict their ability to learn and the strength of their creative skills. So whether you're leading a high-stakes pitch or taking in the weekly sitting status report, your body language can make all the difference. Here are five legit tips to help you put off a positive vibe.   1. Stand tall. Be big. According to research
September 13, 2016

Mae West once famously said, "I speak two languages, Body and English." Turns out, she was onto something. Researchers at Stanford University have found that a person's non-verbal cues can predict their ability to learn and the strength of their creative skills. So whether you're leading a high-stakes pitch or taking in the weekly sitting status report, your body language can make all the difference. Here are five legit tips to help you put off a positive vibe.

 

The art of business communication is exactly that — an art. And like all but the greatest masterpieces, there's usually some room for improvement. Here are four simple tips to take your communications game to the next level. With a little practice, you can build trust, improve relationships, and break down barriers to understanding.
September 13, 2016

The art of business communication is exactly that an art. And like all but the greatest masterpieces, there's usually some room for improvement. Here are four simple tips to take your communications game to the next level. With a little practice, you can build trust, improve relationships, and break down barriers to understanding.

 

If you own a business, you probably have some clients who take their sweet time paying. It's all good - until you have so many unpaid invoices, you can't fund day-to-day operations.  Nobody wants to turn away business. So what do you do when you've got outstanding invoices and your credit line is maxed? Should you take on a partner? Solicit investors? Issue convertible T-bonds? If you're not a jet setting international finance guru, you might consider factoring.  Invoice factoring, also known as accounts-re
September 13, 2016

If you own a business, you probably have some clients who take their sweet time paying. It's all good - until you have so many unpaid invoices, you can't fund day-to-day operations.  Nobody wants to turn away business. So what do you do when you've got outstanding invoices and your credit line is maxed? Should you take on a partner? Solicit investors? Issue convertible T-bonds? If you're not a jet setting international finance guru, you might consider factoring.

 

Acquiring new customers can cost serious time and money. There are sales calls, marketing efforts, and yes, the occasional bribe. Which is why it makes sense to take care of the customers you've got. Because if they end the relationship, you'll be right back to prospecting. Are you doing everything in your power to inspire strong relationships with your clientele?  Here are five tips to help you strengthen customer loyalty.
May 04, 2016

Acquiring new customers can cost serious time and money. There are sales calls, marketing efforts, and yes, the occasional bribe. Which is why it makes sense to take care of the customers you've got. Because if they end the relationship, you'll be right back to prospecting. Are you doing everything in your power to inspire strong relationships with your clientele?  Here are five tips to help you strengthen customer loyalty.

There are plenty of things you'd rather do than sit down, roll up your sleeves, and hammer out billing. Like getting a root canal, say. Or waxing your back. But billing isn't just a necessary evil. It's the lifeblood of your business. Here are five tips to help you improve billing processes and keep the cash rolling in.
May 04, 2016

There are plenty of things you'd rather do than sit down, roll up your sleeves, and hammer out billing. Like getting a root canal, say. Or waxing your back. But billing isn't just a necessary evil. It's the lifeblood of your business. Here are five tips to help you improve billing processes and keep the cash rolling in.

1. Sign on the dotted line. All too often, business owners operate on trust. They think that presenting a contract to a client is offensive or off-putting. It's not. A contract outlines the scope of work, sets firm expectations, and holds both...

Pages

Subscribe to Blog RSS Feed

Search form