When you’re in the construction industry, it’s quite normal to find yourself in dire need of working capital every now and then. Sometimes jobs are scarce, so you have no money coming in. It’s also not an industry in which payments are made promptly. You generally have to wait for 30 days to get your money, and sometimes clients may stretch that period out even further. If you rely on revenue for your working capital, then sooner or later you’ll have a problem.
The solution, in most cases is to get a construction working capital loan. There are several options available for you:
1.Personal loans. For some people, the best sources of loans are family and friends. They’re easier to approach, and generally much more flexible and generous in their terms. However, mixing business and your personal life isn’t always a good idea.
2.Equity funding. This is a loan secured by the value of your construction company. You can get a loan from friends or from investors and then use a percentage of your company as collateral. A home equity loan, in which you use your home as security, also falls in this category.
Bank line of credit. This is like having a credit card for your construction company. You’re allowed a maximum amount of money to borrow, and then you just pay interest on the actual amount you use.
3.The approval of this type of loan, the interest rate, and the maximum amount of the credit line will depend on the relationship you have with your lender, along with your credit score. In general, the interest rate is about 1 to 2 percent above the prime rate.
4.Short term loan. This type of loan involves the use of collateral (usually construction equipment you own), a fixed interest rate, and a specific repayment period (which is usually a year). But if you have an excellent credit history and you have a great working relationship with your lender, you may be able to secure a short term loan even without collateral.
5.AR or PO loans. You may also get a loan for your working capital needs if a lender agrees to consider your accounts receivable or your confirmed purchase orders. A loan like this is ideal if you don’t have the working capital to meet a particular sales order. But you will need a sterling reputation with a proven history of meeting obligations and debts before a lender can agree to this type of loan.
6.Factoring. Technically, this is not a loan at all, although it is a form of financing. You exchange the future value of your accounts receivable for current funds. You typically get about 80% of the value of the invoice, and you get the rest (less the factor’s fees) when the client pays in full.
7.Trade creditor loan. This is a loan that may be offered by a supplier. You get your loan only if you place large orders of supplies with them. You’ll also need a good credit history to be eligible for this type of loan.
Take advantage of all these opportunities. Paying interest on a loan is much preferable than running out of working capital.