Overcoming Financing Challenges with Contractors

BY: Jeff Schleis

The complex nature of contractor accounting practices can present special challenges when looking for financing, whether that be regarding equipment loans or credit facilities to cover short term cash flow needs such as lines of credit.

Contractors use either the “completed contract method” or the “percentage of completion method”—or both—depending on the purpose of the information they are reporting. While either method is acceptable, this discrepancy means that banks aren’t always comparing apples to apples when reviewing financial statements.  The great news is that your lender should know the difference immediately and understand the importance of those financials.

You can make it easier for your lender to review your loan request—and easier for you to get your loan—if you come prepared with information beyond your P&L or balance sheet such as identifying one-time expenses, etc.

Understand How Your Banker Thinks

While your lender is an expert at reading and analyzing financials, contractor accounting requires extra effort to properly assess the following important criteria. These tips provide a road map for working in partnership with your lender to create a relationship and better understanding of your business overall so we can work together toward getting you the loan you need.

  • Accounting method and what your financial reporting represents.
  • Cash flow. This can be tricky to assess accurately. For instance, let’s say a contractor bills for 25 percent of the contract because 25 percent of the job is complete. Seems logical. However, perhaps you have only paid out 10 percent of that cash so far. It will seem like you are flush with cash. Conversely, you may have paid subcontractors more up front and will realize a larger chunk of cash you keep at the end of the project. In that case, your cash flow appears thin now.

TIP: Give your lender a look at your pipeline (Job Status Report) so we can see your current cash flow status in context of your overall financial health.

  • Fluctuations in cost. Raw material costs can rise unexpectedly. Interest rates fluctuate. A piece of equipment may break down. What is your plan for managing those unexpected changes in expenses?

TIP: There is no one right or wrong answer here. We simply want to see you have a realistic plan for handling less-than-ideal conditions. Accessibility to capital may mean easy access to a line of credit or cash reserves you’ve set aside for a rainy day.

  • Seasonal impact. Roughly the same as “fluctuations in cost” above. Some businesses have distinct cycles due to weather or other influences.
TIP:  Again, show us you have a plan.

  • Profit Margins. Competition is tight in our market area. How thin are your margins to win each job?
TIP: It’s okay for one or two jobs to serve as loss leaders, especially on a high-profile building or development. Show us that is not a trend in your overall bidding process by providing a history of successful projects in comparison.

  • Internal systems and controls. How efficient are you? Do you use software to track projects end-to-end? Are there technologies or best practices that could help your business become more productive or waste less? Do you understand where your money is going?
TIP: Talk to us about how you organize your business. Most contractors are good at what they do and understand their COMPANY, but not everyone understands their processes and financials. We can help you better understand your balance sheet, as well as recommend things we’ve seen work in your industry.

What technological specializations are most valuable in today’s market to you?  Are you using new technology for safety or management software?  Most general contractors are becoming more efficient with updated software for their projects, are you able to adapt and integrate?

  • Labor Force. Are you staffed to handle the current project pipeline?  How long have most of your employees been with you?  The market is very competitive for skilled people.  How have you kept them and will continue to?
A successful partnership with your lender comes down to open and honest conversations. Share your pain points, as well as your points of pride. When we ask questions, we are making an effort to understand you and your business better, not judging or trying to find red flags.

At State Bank of Cross Plains, we enjoy the unique benefit of having the assets and capital of a large bank paired with the attitude and infrastructure of a local community bank. Our mission is literally focused on helping local businesses like yours succeed.

Together, we can continue to make our community a vibrant place to live and work.

Jeff Schleis

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