It’s a situation all too common in the construction business: chasing down clients to collect payment. In fact, many of the biggest challenges contractors face are related to cash flow management. The way payments are handled is evolving, and contractors will have to evolve with it if they want to stay competitive. Luckily, there are some interesting new solutions to help contractors meet emerging cash flow management challenges.
THE CHANGING LANDSCAPE OF CASH FLOW
As the construction industry has changed over the years, the former standard practice of upfront deposits increasingly has gone by the wayside, and, as a result, cash flow has been negatively impacted. According to the 2020 National Construction Payment Report, more than 80% of companies said they spend a moderate or substantial amount of time chasing down payments, while more than half say that jobsite coordination issues have negatively impacted their earnings.
What does this all mean? In part, that the vast majority of contractors would benefit from seeking out alternatives to traditional check-based payment methods to better manage cash flow. More to the point, using payment solutions that allow contractors to pay suppliers with a credit card is a beneficial alternative.
As touched on above, the status quo has evolved to put more financial pressure on the contractor as jobs kick off. Launching a new project has a lot in common with launching a new company: coordinating suppliers, staffing the team, connecting with local building authorities and more. But as upfront deposits become increasingly rare, the risk falls squarely on the shoulders of the contractor. In general, the construction industry suffers from particularly bad days sales outstanding (DSO), with an average of 51 days between invoice and payment. In practical terms, this means contractors end up de facto financing the projects they’re building.
On the other end of things, the vast majority of suppliers used by construction businesses operate on a cash- or check-only basis. Contractors end up needing access to funds before they’ve received any payment from clients, putting them in a double bind.
But deferred payments don’t have to be the norm. There are now payment platforms that allow contractors to pay their suppliers with credit cards, regardless of whether a supplier is set up to take them. These platforms are built to allow contractors to use any credit card to pay their vendors. This eliminates the need to chase down deposits or delay payments, potentially damaging relationships with suppliers.
Evolving supply-chain uncertainty provides yet another set of challenges and opportunities. Oftentimes, pricing on construction essentials can fluctuate significantly as supply chains become more challenged. Having access to funds for upfront payments gives contractors the opportunity to save time and money. This is especially true of overseas vendors, who tend to require higher initial deposits and can be significantly inventory-limited (especially recently). Essentially, it boils down to this: If contractors have better access to funds to pay suppliers more quickly, they can finish the job and get paid by the client earlier. Being able to pay with a credit card’s line of credit can unlock some of this potential benefit.
If you think this sounds like an unsustainable state of affairs, you’re not alone. Accounting firm PricewaterhouseCoopers predicts that the volume of cashless payments will double to almost 1.9 trillion by 2025 and nearly triple by 2030. Contractors will need to embrace cashless payments as they become more commonplace to remain competitive. Additionally, vendors will be less accepting of deferred payments, and contractors will have to seek out alternatives. Even today, evolving payment platforms give contractors the flexibility to float payments to vendors and extend payment terms, so they’re able to reap cash-flow benefits before they get paid from customers.
THE NEXT GENERATION OF PAYMENTs
What can contractors do to get ahead of the curve? There are several alternative payment platforms, each with its own pros and cons. Some of these solutions give businesses a high degree of flexibility without adding a layer of time-consuming client-side approvals. Other options, such as Venmo, PayPal and Zelle, are also on the table but tend to have higher fees, transaction size limitations and require vendors and clients to adopt the platform.
Regardless of the platform, the need for change is evident. To remain competitive, contractors will have to adopt new ways of managing cash flow to face the evolving challenges the construction industry is facing. Supply-chain management, financial risk mitigation and access to advantaged pricing will all be made much easier by adopting new ways of paying and getting paid. Being able to use credit cards in addition to cash on hand helps get every project closer to its best possible outcome: on time and under budget.
