CONSTRUCTION Accounting ARTICLE -
Preparation Is Key for Contractors Seeking Credit
Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants
Bank lines of credit are lifelines for many contractors. But, as you may be all too aware, convincing a bank to provide or renegotiate a line of credit is no small feat in today’s economy.
Although the financing market remains tight, it’s still possible to prevail in a search for credit. By building your case beforehand and knowing all of the available options, you’ll have a better shot at getting the dollars you need.
Crunch the numbers
Before you set foot inside a bank, analyze your projected balance sheets and projected future earnings thoroughly. Many lenders are looking for increasingly sophisticated number crunching on the applicant’s part, including up to 36 months of cash forecasting and financial contingency plans.
You’ll also need to realistically assess how large of a line of credit you’ll need. Lines of credit are meant to be a short-term cash solution while you’re waiting for accounts receivable to come in, and being fully extended on your line of credit can make it harder to obtain surety bonding. Plan to use the funds for basic operational items — not capital purchases, such as construction equipment.
Choose the right lender
When choosing an institution for a line of credit, it pays to think like Goldilocks: not too big, not too small, but just right. Depending on your needs, you may fare better with a community bank, which typically prioritizes lending to small to midsize businesses. On the other hand, a national bank often has more funds to lend.
When you approach your chosen lender, be open about your financial situation, including any typically slow work and cash-flow periods. This will help your lender target the right credit solution for you, and you’ll be able to learn about any impending personal guarantee issues.
Consider the alternatives
If you’re shut out of traditional lending altogether, alternatives are available. Many contractors negotiate payment due dates with their vendors to get themselves out of short-term cash binds.
Other options include factoring, whereby a company buys your invoices and advances you a percentage of the invoice amount. There’s also asset-based financing, whereby you pledge inventory or equipment as collateral for a loan. One caveat: The fees and interest rates in these arrangements are typically higher than those in traditional lending.
Tap into it
While the flow of credit has slowed in recent years, savvy contractors can still tap into needed amounts under the right circumstances. Plan carefully and approach the marketplace with an open mind.
Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.
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