The coronavirus sure is raking the economy over the coals. The COVID-19 outbreak is threatening cash flow for construction businesses across the country. And the impact is only expected to get worse. Contractors and suppliers should act now to take advantage of credit lines, SBA Disaster Relief Loans, and other financing options – before they run out of cash.
Coronavirus is crushing contractor cash flow
Contractors and laborers are being quarantined. Construction material shipments from China are getting delayed. And Boston and other cities have already shut down all construction activity.
In the midst of the coronavirus-driven chaos, construction businesses still have bills to pay. You still have to make loan payments on your office building or backhoe. You still have outstanding invoices from suppliers to pay. And of course, your office and field staff still need to get paid.
But as construction projects are cancelled or delayed, contractors will have less cash on hand to pay their recurring expenses. In order to make up for the shortfall, construction businesses will likely need to find a source of funds that can carry them through a stoppage — the length of which is still unknown. The steps that contractors and suppliers take to prepare for coronavirus now may be the difference between getting through it — or giving up.
The Small Business Administration (SBA) announced a special disaster recovery loan program specifically for businesses – including contractors & suppliers – whose cash flow has been affected by the coronavirus. But with everything happening so fast, some of the information coming out is confusing. Who can apply? How much does it cost? And is it worth it?
Let’s take a look at the SBA loan program, the pros & cons, and some alternative funding options for contractors and suppliers.
SBA Disaster Relief: 30-year loans for contractors
The SBA Disaster Assistance program for coronavirus (COVID-19) provides low-interest loans of up to $2 million to help businesses recover from “substantial economic injury.” SBA loans are available to businesses of any size (as well as homeowners) and offer long-term repayment options. Borrowers can repay loans over a period up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
What can SBA loans be used for?
The coronavirus is likely to hit the construction industry particularly hard. The SBA is offering disaster assistance in response to the coronavirus to help businesses across all industries recover from the economic impact.
For construction businesses, an SBA Disaster Relief Loan is intended to provide working capital to make it through the business interruptions. Contractors can use an SBA loan to pay fixed debts, payroll, accounts payable, and other bills.
SBA loan eligibility
The SBA is rolling out the loan program in specific regions of the country. It is limited to businesses in the geographic areas that they are currently targeting. View regions eligible for SBA Disaster Relief Loans under the coronavirus program.
The program may grow to include more regions. But at the moment, there’s no way to know yet if or when the program will expand to reach a particular area.
Contractors and suppliers in the SBA’s target regions also need to meet their general requirements:
- U.S. based business owned by a US citizen or Lawful Permanent Resident who is at least 21 years old
- Good personal credit score of 640 or higher
- Absence of outstanding tax liens
- Zero bankruptcies or foreclosures in the past 3 years
- No recent charge-offs or settlements
- Current on government-related loans
- Minimum 2 years in business
SBA loan interest rates & terms
The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%.
Repayment terms are different for each business, as payments are typically based on a percentage of the borrower’s revenue. The loan can be repaid over a period as long as 30 years.
When to apply
Whether securing funding through SBA or elsewhere, construction businesses should apply as soon as possible. The more time passes, and the more the program expands, the more applicants there will be.
With the scope of the COVID-19 outbreak growing quickly every day, the number of businesses applying to the program – across all industries – is likely to be extremely high. Banks, lenders – and even the SBA – have a finite amount of funds to distribute. The sooner you apply, the quicker you can get in line for cash support.
How to apply for an SBA Disaster Relief Loan
Contractors or suppliers interested in applying for an SBA Disaster Relief Loan can do so directly through Levelset. A member of our team can help you explore and understand all of the financing options available to you, including SBA loans.
Construction businesses will need to provide:
- Business Tax Returns
- Personal Tax Returns
- Current Business Debt Information
- Profit and Loss Statement
- Balance Sheet
- Business Bank statements
You can also apply online via the SBA website.
Cash for contractors: Alternatives to SBA loans
A traditional bank loan may be an option for businesses with good credit history and financial statements. They carry a relatively low interest rate, but it’s not for everyone. Small businesses that use cash-basis accounting likely won’t be able to access these funds.
One downside to a traditional loan is that you have to pay interest on the full amount, whether or not you actually use the cash. No one knows how long the economy will be affected by the coronavirus pandemic. Construction businesses don’t know exactly how much cash they’ll need to get through it. With a bank loan, you may end up paying interest on cash that you don’t actually use.
2. Line of credit
A line of credit is like a pool of money that a contractor can draw from when they need it. You only pay interest on the amount that you use. It can be a good option when you’re uncertain about the amount of cash you need to get through a project (or a coronavirus shutdown).
Probably the most common type of credit line is one that’s currently burning a hole in your pocket: A credit card. You have a maximum credit limit – that is the pool of money that you can borrow from. If you don’t use any of it, you don’t pay interest. But it’s there for you when you need it.
A credit card is an unsecured line of credit, meaning the money you borrow is not secured by a physical asset.
A secured line of credit, on the other hand, is backed by a company’s assets, which are used as collateral. (The most common type is probably a home equity line of credit.) A contractor may take out a secured line of credit against their equipment or property. If the contractor doesn’t pay back the loan, the lender can repossess the equipment.
Interest rates on a line of credit vary based on the borrower’s financial history, credit score, and other factors. Rates will typically be significantly higher than traditional bank loans, or SBA disaster relief loans.
3. Invoice factoring / financing
Construction factoring companies will buy outstanding invoices from you – almost as soon as you issue them, and before your customer pays. Invoice factoring may be a good option for construction businesses who are still working on projects, but are afraid work could stop at any moment. You don’t have to wait to see whether your customer will be able to make the payment in 30 days. Instead, invoice factoring allows you to get the money up-front, so you can better weather unforeseen storms.
Invoice financing works in a similar way, though it’s more like an asset-backed loan, using your accounts receivable as the asset. The financing company provides a loan for a percentage of the accounts receivable (usually 75-85%), and you pay it back over time, with interest.
Contractors & Suppliers Should Act Quickly
With the coronavirus rampaging through nearly every sector of the economy, it’s likely that credit lines and funding sources will dry up at some point. Contractors and suppliers should act now: Sit down with your office manager, bookkeeper, accountant, or financial advisor. Whoever has their finger on the pulse of your cash situation. Prepare some cash flow forecasts based on different scenarios. How much cash do you need on hand for the worst-case?
Assess your financing options. SBA Disaster Relief Loans are attractive for construction businesses in the eligible areas, but they won’t last forever. With so much uncertainty right now, it may be better to secure the cash you need to ride it out over the upcoming months.
Not sure which cash option is best?
Levelset has construction finance experts on staff that can walk you through the options. We can even help you apply for SBA loans, invoice factoring, or a line of credit directly through our site. Contact a Levelset finance professional now.