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.
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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