Supply chain finance in the commercial construction industry is terribly broken, and it has been for decades. Contractors and subcontractors are sandwiched between poor payment cycles and a lack of credit options where they sit at the bottom of the payment stream. However, despite the headwinds of access to capital and slow-paying projects, contractors are optimistic about their growth for the rest of this year. While they have maintained an entrepreneurial spirit despite the continuous supply chain and economic woes brought on by the COVID-19 pandemic, they still face a variety of cash-flow challenges barring them from growth.
To gain a better pulse on the current challenges being experienced in the industry, Billd surveyed 572 contractors about their appetite for business growth and how they plan to finance that growth. The responses call attention to persistent construction industry challenges that prevent growth, including a lack of access to capital, inconsistent payment cycles and the insufficient length of supplier terms.
For example, while nearly three-fourths of contractors surveyed say they plan to grow their businesses in 2021, nearly half (46%) say they struggle with cash flow issues. Unfortunately, traditional banks and lending institutions are hesitant to do business with construction companies due to their perceived risk, which means contractors are often under-capitalized and left trying to finance growth with limited free cash flow.
The Challenge of Using Cash Flow
As contractors look to grow, 44% of survey respondents believe they’ll use cash on hand to finance their growth goals. However, data and consensus on commercial construction payment cycles suggests that this is not entirely viable. While some growth may be possible with existing cash flow, it may not be as large or sustainable as contractors hope. Eating into working capital to finance growth, in the absence of additional financing, has inherent limitations. Every contractor is familiar with the erratic and unpredictable nature of commercial construction payment cycles.
Project payment is contingent on multiple factors, with the potential for considerable delays in the payment chain. Cash flow alone is far too unpredictable to consistently and comfortably pay on time for labor or materials, let alone to reliably finance the sizable expenses that come with scaling a business.
The Shortcomings of Supplier Terms
While about half of contractors responded they’re satisfied with their supplier terms for financing construction materials, 63% claim they pay for materials before getting paid for their work and less than 4% have supplier terms longer than 60 days. However, additional data shows those terms are not long enough to support construction payment cycles. For example, despite their overwhelming popularity as a payment method for materials, supplier terms do not offer contractors the flexibility they need to grow into larger or more complex commercial projects.
Supplier terms also cost contractors money and minimize negotiating power as they bring underlying costs, not immediately visible to the contractor. For example, suppliers offer cash discounts, or options like 2/10 Net 30. These built-in discounts for paying in cash are essentially fees when using the terms. Generally accepted industry data indicates it takes between 60 days to 90 days for contractors to get paid for their work. Therefore, the length of terms in relation to project payment timelines are their ultimate shortcoming.
An over-reliance on lines of credit
If cash in hand or supplier terms are not an option, 38% of contractors reported they rely on credit for project expenses, such as equipment, materials and payroll. This is problematic, contradicting the best practice of keeping credit lines reserved for emergencies. Payroll, equipment and material purchases are sizable expenses that quickly eat into a contractor’s credit line. In the event of an emergency, they may not have the credit available to overcome it.
Overcoming cash flow challenges with new finance options
For contractors, it’s not just about growth—it’s also about survival. Flexible financing options have quickly become integral to conducting business in this turbulent market. We’ve all watched as material availability has become scarce and prices have skyrocketed. Without a landscape of supportive, flexible financing options, it will become increasingly difficult to do business at all in the industry. Subcontractors are business owners for whom access to capital isn’t “nice to have,” it’s a necessity.
The lack of subcontractor credit options presents a ripe opportunity for new companies to charge into the industry to offer credit options tailor-made to the industry needs. In doing so, contractors will have wider access to capital, and will be able to grow their business and overcome cash-flow challenges.
