From high equipment costs to labor shortages and seasonal fluctuations, construction companies face unique challenges regardless of size. In fact, the industry has one of the highest concentrations of small businesses. According to the Bureau of Labor Statistics, more than 60 percent of construction workers work for small businesses with fewer than 50 employees.
For these smaller firms, getting access to capital in order to grow their business, and managing cash flow is a necessity. From a recent survey, 28 percent of construction firms cite cash flow as the biggest challenge during their first year in business — a concern that outweighs finding new customers.
The fourth quarter is an especially critical time of year. One-third of small real estate, construction and property management businesses report that the fourth-quarter is their most profitable time of year. At the same time, nearly half (44 percent) of construction businesses report their costs increasing by 25 percent on average. To curb common challenges, here are tips that can enhance cash flow.
Get Paid Faster
While the industry standard is to bill clients in three or four large installments over the course of a job, consider billing clients after each small step: for demolition, sheet rocking, windows, insulation, plumbing, electrical work and so on. This will help you receive a steady income, so you can best plan and forecast cash flow. Your customers will likely prefer this method of payment too because it allows them to split up their bills into smaller, more manageable sums.
Consider Your Funding Options
Since banks often require old bank statements and dated tax returns it can be challenging for business owners lacking long credit histories to get access to funding. On top of this, small businesses are oftentimes overlooked by banks favoring bigger companies seeking larger loans.
Many small business owners have begun using online lending platforms that look at their live data to approve funding. These innovations allow for wider and more varied types of business loans, faster access to working capital, and evaluation processes that consider a company’s current business performance instead of dated documents.
For example, when Diana Lewis, a construction business owner in Florida, needed to hire additional employees and buy new equipment for D&J Erosion Control, she applied for a small business loan through her bank but only received a portion of what she asked for.
Through online lending, Diana was approved for a flexible line of credit that matched her business needs. Getting the access to the funding she needed allowed D&J Erosion Control’s revenue to double in just one year.
Seek Out Certifications that Give You Financial Opportunity
Like most construction companies her size, Diana relied on personal connections for her first jobs. But she soon realized they’d have to reach out in different ways if they wanted to grow.
She learned that as a woman business owner she could apply to the state for what’s known as a DBE (disadvantaged business enterprise) certification. Because companies are required to offer a certain percentage of their work to DBEs, Diana’s company could guarantee work with the new certification. Many states have certifications for veteran-owned businesses, women- and minority-owned business enterprises (WMBE) or businesses in an underutilized area, or HUBZone-certified businesses. For more information about certifications that may work for you, browse the Small Business Administration’s Certification Guide.
Find a Mentor to Help You Weather the Ups and Downs
Most small business owners learn how to manage their cash flow challenges through trial and error. You can reduce common mistakes by seeking advice. A mentor or advisor can help you keep an eye on your longer-term goals, anticipate upcoming expenses, and give objective advice about cash flow issues. A 2018 survey of small business owners found that an overwhelming majority (92 percent) believe that mentors have a direct impact on the growth and survival of their business. Yet, only 22 percent of small businesses owners reported having mentors when they started their business.
For those searching a mentor, try connecting with industry contacts on LinkedIn or visit your local Small Business Development Center. The SCORE Association’s “Counselors to America’s Small Business” is also a great program that matches volunteer business counselors with aspiring entrepreneurs and business owners. Builders and remodelers can also join the NAHB's 20 Club Program, which brings together professionals from non-competing markets to exchange ideas and expertise.