Construction

The Construction Industry Advisor

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Where can you turn when facing a cash crunch?

Sooner or later just about every construction company needs an infusion of cash for working capital, equipment or expansion. You'll find many sources that can provide the money you seek, but the terms and conditions will vary widely. That means you'll need to shop wisely and read the fine print.

Take it to the bank

The most logical place to look for cash is your current bank. Assuming you have a good relationship with your bank and your business is in good standing, you should be able to obtain a conventional bank loan. If, however, your ability to repay debt is unclear; you have a poor credit history; or you don't have sufficient collateral to cover the debt, even your bank may turn you down.

But don't give up hope: Banks have different kinds of appetites for different kinds of deals. Ask your banker about a U.S. Small Business Administration (SBA) loan. The SBA offers a multitude of loan programs that bolster the ability of lenders to provide both long- and short-term financing to small businesses that might not otherwise qualify for traditional loans.

SBA could save the day

SBA loans offer the flexibility of longer repayment periods and looser affordability requirements than normal commercial business loans. The SBA's guarantee assures the lender that, if you don't repay the loan, the federal government will reimburse the bank, up to a certain percentage, which varies based on the loan amount. Even though the SBA backs the loan, however, you're still obligated for the full amount due.

To be eligible for SBA loan assistance, a construction company must have annual sales or receipts of not more than $6.5 million to $31 million, depending on the specific business type. Special trade contractors, for example, max out at $13 million in annual sales or receipts, while general building and heavy construction contractors max out at $31 million.

The SBA's primary program is the 7(a) loan, which provides a maximum of $2 million, with a guarantee of 75%. Loans of $150,000 or less have guarantees of 85%. Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets.

Give credit to lines of credit

If you don't want to take on the financial burden of a loan, consider getting a line of credit at your local bank to make up the difference between current spending needs and cash on hand.

You can access a line of credit as you need the money and repay it as cash allows. You pay interest only on the outstanding amount.

That means you could, for example, take $3,000 of a $10,000 credit line to meet a 30-day need, pay interest on it for that amount of time, pay it back, and then borrow again. By contrast, with a $10,000 loan, you would pay interest on the entire amount, whether you used all the money or not.

Cash is king

If you pay close attention to your cash flow, your construction company will likely keep growing. But if you do find yourself facing an unexpected money problem, it's reassuring to know there are sources you can turn to for help.

Sidebar: Brokers can find what you can't

If finding the right loan options is eluding you, ask a broker for help. Brokers don't lend money -- they're experts at finding those who do.

For a fee, a broker will generally perform a thorough review of your finances, discuss any problems involved in qualifying for a loan, including credit concerns, and then go out and find you the cash. Because they deal with multiple lenders, they can shop for you, identify suitable lenders and negotiate the terms.