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During the recession of the late 2000s, the value of construction work plummeted 40% and 150,000 businesses were forced to shutter their doors. With many economists predicting another economic downturn, how can developers and contractor’s recession-proof their business?

The key for construction businesses to withstand a recession lies in smart financial planning to mitigate that impending risk.

Banking Relationship

For developers and contractors, the first thing they must have is a strong relationship with their financial institution. Contractors and developers need to vet a bank as a lender as much as the bank will vet their potential client as a lendee. It’s important to look at the bank’s financial statements, understand its exposure in the industry, its loss history and, most importantly, its track record of surviving recessions and being able to service clients during a downturn. There needs to be an assurance that the bank can survive a major drop in the market and remain solvent.

Rather than simply choosing a financial institution with the lowest rates on a given day, developers and contractors should look for a financial partner that can service their business when challenges arise. The relationship financial institutions have with the client absolutely influences how problems can be resolved—lendees tend to prioritize their long-term clients.

Contractors or developers might be nervous to approach their lender when a problem first presents itself on a job. However, the banker must be one of the first people alerted, not the last. When a customer informs the bank of a problem that has existed for six months, it’s almost too late. At six hours, it’s an issue; at six months, it has morphed into a huge problem with fewer available solutions. Do not be afraid to be transparent with the banker. Treat them as a trusted advisor, not a parent waiting to punish you. When the developer, contractor, and bank are all on the same page and know how to get to the end, bankers are able to quickly turn around projects

Be an Attractive Risk

Being able to weather a recession means being able to continue to do business during the downturn. To do that, access to financing services is critical. During challenging economic times, a banker is going to look hard at several components of the potential client’s business, including the following.

  1. The number of liens or lawsuits against a potential client. If a company had very few and suddenly has a spike, it makes the hairs on the banker’s neck stand on edge. The trend always stands out more than the numbers.
  2. A review of financial statements, looking at liquidity and debt. The bank wants to make its clients have the capacity to handle short-term hiccups.
  3. Contractors and developers should also expect to provide a list of current and upcoming jobs, including where the project is located and the property type. In a recession, some projects have longer stabilization periods, such as building a hotel or an assisted living center. Other projects are faster to build from a construction standpoint, including apartment complexes and industrial buildings, and can get to the market sooner. A bank is more likely to support a loan where the risks are properly identified with a shorter stabilization period.
  4. The longevity of the company and its history during other economic downturns will be reviewed by the bank. 
Be Strategic

For companies with long-term strategies in place that anticipates market fluctuations, the downturn can provide opportunities. This is a good time to undertake short period development projects, search for new markets and even acquire or expand the business.

The question of another recession isn’t if, but when. All markets have ups and downs. By being proactive, a developer or contractor can withstand market downturns, protect their assets and possibly even use it as a springboard for growth.

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