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.

Let’s say you’re handy and you’ve got $10,000 saved up to start a company. You’ve invented a life-changing business tool called the Really Cool Thing that you can sell for $1,000. You rent a small production space, pay $2,000 for first and last month’s rent and pay yourself a $1,000-a-month salary.    In your first month you make and deliver four Really Cool Things – enough to cover expenses. Your product’s a hit and you get orders for twelve more, to be delivered in the next 30 days.     One snag: You only
September 20, 2015

Let’s say you’re handy and you’ve got $10,000 saved up to start a company. You’ve invented a life-changing business tool called the Really Cool Thing that you can sell for $1,000. You rent a small production space, pay $2,000 for first and last month’s rent and pay yourself a $1,000-a-month salary.

 

In your first month you make and deliver four Really Cool Things – enough to cover expenses. Your product’s a hit and you get orders for twelve more, to be delivered in the next 30 days. 

 

A lot of people are talking about factoring these days. But if the Internet has taught us anything, it’s that a lot of people don’t know what they’re talking about.    Factoring is often confused with accounts receivable financing, a loan secured by customer invoices – with all of the closing costs and paperwork that implies. With a loan, you pay the money back, plus interest.    A factor pays you – advancing up to 100 percent of the invoice value, upfront – and collects from your customer on the invoice du
September 12, 2015

A lot of people are talking about factoring these days. But if the Internet has taught us anything, it’s that a lot of people don’t know what they’re talking about.

 

Factoring is often confused with accounts receivable financing, a loan secured by customer invoices – with all of the closing costs and paperwork that implies. With a loan, you pay the money back, plus interest.

 

Search for the term “factoring” online and you’ll inevitably find an article or two suggesting that factoring is expensive. The question to ask yourself is: compared to what?    If the article tries to compare factoring fees to loan interest rates, you can tell right away that they’re comparing apples to oranges. Factoring is not a loan, it is a sale.    In sales, discounts are a time-honored tradition, with sellers shaving a little off their price to sell more, or meet a specific cash flow target. It is cu
September 07, 2015

Search for the term “factoring” online and you’ll inevitably find an article or two suggesting that factoring is expensive. The question to ask yourself is: compared to what?

 

If the article tries to compare factoring fees to loan interest rates, you can tell right away that they’re comparing apples to oranges. Factoring is not a loan, it is a sale.

 

Has this ever happened to you? Your sales team lands you a nice big order. You check inventory and realize you’re going to have to short ship and disappoint a potentially lucrative customer, or crank up the assembly line to meet your delivery deadline.    Business is good, but most of your cash is tied up in orders that have been delivered but are awaiting payment. It’s going to be at least 30 days before you see that money, and you need to get busy now.      You go see your banker, who applauds your succes
September 05, 2015

Has this ever happened to you? Your sales team lands you a nice big order. You check inventory and realize you’re going to have to short ship and disappoint a potentially lucrative customer, or crank up the assembly line to meet your delivery deadline.

 

Business is good, but most of your cash is tied up in orders that have been delivered but are awaiting payment. It’s going to be at least 30 days before you see that money, and you need to get busy now.

 

 

I didn’t get into business to chase money, but for awhile it seemed as if that was all I was doing – calling and emailing customers to check on the status of payments. I stalked the mail carrier every day, watching for the truck and racing to the mailbox only to find a whole lot of empty.    Don’t get me wrong. Business was good – I was making more than I ever had working for somebody else. And my customers always paid – eventually. But I had one customer stretch me out over three months to the tune of $21,
August 26, 2015

I didn’t get into business to chase money, but for awhile it seemed as if that was all I was doing – calling and emailing customers to check on the status of payments. I stalked the mail carrier every day, watching for the truck and racing to the mailbox only to find a whole lot of empty.

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