Subcontractors inevitably need money to replenish their cash flow because the industry can be very volatile. There may be times when there are few projects, which may make it difficult to meet payroll. When there are too many projects, as a subcontractor you need lots of working capital to pay for supplies and equipment rental.
So where can you get the money you need to maintain business operations? Usually, there are several types of construction company loans for sub contractors.
- Bank loans. Most businesses often turn to banks when they need additional funding, and subcontractors are no exception. The problem is that often the bank will require a lot of collateral. It’s not uncommon for a bank to secure assets that are worth 2 or even 3 times the amount of the loan. Add the fact that bank loan approval rates are only about 20% and that loan applications can take a very long time to process, and it is quite obvious that this method may not the best option.
- There are other problems too. As a subcontractor, you’d have to meet monthly payments, and that can be a problem when you have a time when business is slow. And if you need more money, you will have to renegotiate the loan.
- Asset-based lending. If you have some real estate you can use as collateral, then you may get construction company loans for sub contractors. Stock and even the cash value of life insurance can also serve as collateral. The accounts receivables less the accounts payable can also be used as security, but many banks don’t like progress billings which are common in the construction industry.
- Here, the problem is that often a subcontractor doesn’t have the assets needed for loans.
- Factoring. This is a form of financing which isn’t really a loan at all. In this method, the factor company buys the invoice from you, and then gives you anywhere from 70 to 80 per cent of the value in advance. When the invoice is paid, you get the rest of the money after the factor has deducted its fees. With this method, you won’t have to make monthly payments and you can choose the invoice to factor so that you get the money you need. Factoring has a very high approval rate, and the process can be very quick. Once the factoring line has been set up, you can get your advance in just 24 hours.
- All these construction company loans for sub contractors have their pros and cons, and it’s up to you to choose which one is best for you.
- For example, let’s say you have a single invoice totaling $120,000. Your agreement with the factor has you paying 2.5% of the total as a fee for the first 30 days and you receive 80% in advance. That means you get $96,000 right away instead of having to wait thirty days for the contractor to pay in full. When the contractor does pay in full, the factor keeps the $3,000 as their fee and you get your $21,000.