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While the construction business continues to flourish, the competitiveness of the industry and contractors’ access to working capital continues to get more complicated. Most contractors get paid during various stages of a project, or sometimes only when the project is fully completed. This complicates things when it comes to acquiring capital through traditional lenders.

Traditional lenders and big banks like to see aging receivables and base their funding amounts on this, collateral or both. Because of the typical construction payment system and the fact that many contractors work based on purchase orders, traditional lenders often are a little hesitant when it comes to funding—which is a problem.

The cost of materials, equipment, payroll and other business necessities calls for access to working capital, especially when contractors also need to account for bills and fixed overhead costs. Almost all alternative funding companies are sympathetic to this and offer quick and easy funding solutions. Following are a few of the alternative funding solutions available to construction business owners, as well as the ways the working capital acquired can be used.

Alternative Lending Options for Contractors

  • Merchant cash advance: This is probably the most common term used in the industry and refers to short-term financing transactions that are collected through a set percentage of your Visa and MasterCard sales accepted at a place of business. These do not have a set repayment schedule and are based on the volume of your businesses credit card processing sales. They are usually only guaranteed by the future sales of your business.
  • ACH loan products: These are a bit different than cash advances, as they are considered loans and may have personal guarantees. They have a fixed repayment schedule that is paid either daily, weekly or monthly. These products are catered to industries that do not accept credit cards and need a fixed payment.
  • Equipment financing: This refers to any type of loan or extension of credit to a business, with the purpose of helping the business acquire new equipment. Equipment financing can take the form of a lease, SBA loan, and are not restricted to merchant cash advances and ACH loans.
  • Business lines of credit: This is a rotating loan that gives business owners access to a fixed amount of money, which they can use day to day according to their need for cash. Interest is only paid on the amount of the advance actually used.
  • Term loans: Term loans are loans backed by a bank for an exact amount and include a specified repayment timetable and interest rate that are adjusted accordingly. Terms mature between one and 10 years.

Ways Working Capital Acquired Through an Alternative Funder Can Be Used

Alternative financing allows construction business owners to focus their working capital anywhere they see fit, including, but not limited to:

  • purchasing new equipment and machines;
  • hiring and training new employees;
  • business expansion (e.g., opening a new location or purchasing additional office space);
  • taking care of bills, insurance fees and overhead costs; and
  • employee payroll.
For example, take an owner of a roofing company who needed access to funds quickly. The owner has a handful of projects on his plate and receivables due to a form on a large ongoing project not being paid on schedule. Using alternative lending, the owner could apply for working capital to be used toward the purchase of materials, construction equipment, licensing for projects to be completed and payroll.

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