7 Solutions for Contractor Cash Flow Woes

06
December 2019
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Are you feeling cash crunched? You're not alone.

84% of construction firms reported cash flow problems, according to a survey. And 19% of respondents reported dealing with cash flow issues constantly.

Cash flow is a real concern for construction professionals. Cash flow issues can impede your ability to grow your business, make it difficult to make payroll, and even affect your ability to take on more work.

Here are seven solutions to try if your business is facing cash flow woes.

Evaluate Payment Terms

While a majority of construction companies get advanced or regular payments throughout a project, approximately one-third of construction pros only get paid when they complete a project.

Having to front the cost of a construction project is a lot to ask. And it can seriously eat into your available cash flow.

Take a look at your contract payment terms. If you're not getting advanced payments or regular payments throughout the project, rework your contract.

Ideally, bill clients often and regularly. Establish a regular cadence for billing, such as weekly, monthly, or bi-monthly, and write it into your contract.

Have a Plan to Get Paid on Time

Are you getting paid on time?

Only 8% of contractor companies can definitely answer, "Yes, every time."

But over one-third of construction professionals confess to either rarely or never getting paid on time.

Late payments can interfere with your cash flow. Incentivize early payments and penalize late payments from clients. Include these terms in your contract and be sure to include a clause that outlines interest charges for late payment.

Provide Multiple Payment Methods

Don't make it difficult for clients to pay you. Provide multiple payment methods that are easy and straightforward.

Credit cards, debit cards, PayPal, checks, and cash... there are so many methods to get paid.

But limiting yourself to a single option can make it difficult for clients.

Limiting payment options could alienate a client base, too. Younger clients may be more accustomed to paying online, while older clients may feel more comfortable sending you a check. Accept both to make it easier to get paid.

Send Pre-Liens

A mechanic's lien is a legal claim in a property for unpaid construction work and supplies, and a potent tool to ensure your client pays you on time.

Sure, the lien itself protects your investment in a project in case payment issues arise by turning the owner's property into collateral. But the "side-effect" of obtaining a pre-lien is to reinforce prompt payment from your clients.

Pro-actively sending Preliminary Notices (aka Pre-liens) is an industry-standard practice and a tool used by the most liquid construction companies. Don't wait until payment issues arise to take this proactive step.

Close the Gap Between Clients and Vendors

Take a look at your payment terms for clients and vendors. Which is more favorable for your cash flow?

If you have longer terms for your clients than you have for your vendors, you'll always be dipping into your cash flow.

In an optimal situation, you'll collect from clients before you submit payments to vendors. If that's not happening, take a look at your contract terms with both.

Negotiate with Vendors

Don't have a "set it and forget it" mentality with vendors. Instead, always be negotiating!

Make it routine to price-check your materials and supplies. Then, get in touch with your vendors and let them know if you've found a better deal. Your vendors are sure to price-match to keep your business and may offer you new deals on the fly.

Just one more reason to be sure to have cash on hand: getting bulk deals can help you save on supplies in the long run.

Obtain Funding

Sometimes it makes sense to pay costs upfront, like when a discount is very attractive. But other times, financing could be the key to getting materials and supplies you need and spreading out the payment terms.

Keep your cash on hand for things like operating expenses and payroll.

You may be able to secure highly desirable terms on a loan or line of credit, such as deferred interest or double points for an introductory period.

Or you may be trying to play catch up from some old contracts that don't incentivize early payments, require regular billing, or charge interest for late payments.

Either way, obtaining funding for equipment, materials, and supplies may be the best way to free up cash for operating expenses.

Take the time to review your contract terms for clients and vendors and look for ways you can get paid regularly. With a little effort in place, you may find yourself in the minority: one of the lucky few construction companies that don't worry about cash flow woes at all.

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