Webinar: How Payment Can Go Wrong Without Construction Financing
The construction payment issue is a double-whammy for contractors. One the one hand, you can expect to wait 30 to 90 days to get paid after you invoice. On the other hand, you need cash to perform the work before you can invoice.
Watch this webinar to learn:
– How the most common contractor funding solutions affect payment
– Why to avoid Merchant Cash Advances
– How financing protects your job and helps you perform
Our Experts for this session are:
– Scott Peper – CEO, Mobilization Funding
– Michael Williams – Manager of Financial Services, Levelset
Full Webinar Transcript
Michael:
All right, everyone, welcome and thanks for attending this session. I’ll introduce myself again, I’m Michael Williams, manager of financial services here at Levelset. At Levelset, we help contractors get paid, we help them get what they earn. So we hope this session’s going to be informative, but as always, if you have any questions unanswered after this, you can always go over to Levelset.com and visit our expert center to ask questions to payment experts for free. So without further ado, I’ll kick it over to Scott at Mobilization Funding to get us started.
Scott:
Thank you Michael. I appreciate it and welcome everybody. I appreciate you guys taking the time this afternoon to meet with us. This was a topic that in my personal work life we talk about all the time. So I thought it was a great one to share with you all when given the opportunity. So what I want to talk about today and three things that you guys can really focus on and what you can expect to learn today, are really all the positive and negatives that are associated with the most common contractor funding solutions, who they are, what they are, why merchant cash advances in particular are a real problem.
Scott:
It’s a passion of mine to talk about that because I’ve seen some significantly damaging great businesses, just be really hurt and damaged and great people, and I don’t want to say for no fault of their own, but the awareness of the actual merchant cash advance, what it is, what it does, if that was known on the front end, they probably would have never got in that situation. So I’m hoping to touch on that today.
Scott:
And then the most important thing is how having an actual finance partner will protect you and to help you perform and to actually get you to more work and get you paid on time. We’re no different then any of you. We have finance partners that help us run our business and do our business. Without them, I wouldn’t even be in business. And so I’m going to touch on all those things and relate them to construction as well.
Scott:
So again, why are slow payments so painful for contractors? I’m sure that’s a scenario you all work with and you all are very familiar with. So to touch on just the realities of that, let’s just walk through an actual construction project. You work hard for a year, you estimate work and you’re finally awarded the work. You finally get your notice to start and all of a sudden that’s great, perfect. But now you’re thinking, how am I going to pay for all this? And [inaudible 00:02:32] construction project is very interesting in that you do all the work up front, I’m sorry, a contractor does all the work up front. They invoice at the end of the month and anywhere from 30 to 60 days they get paid.
Scott:
And in reality that seems like the norm and that seems okay and it is on a construction project, but incurring costs in real time and waiting up to 60 or 90 days to actually get paid, is a real huge problem. To make that even worse once you do get paid, to have 10% of that invoice held or up to 10% of that held in retainage is even a bigger problem. And why is that?
Scott:
I’ve seen people say, “Oh, it’s only 10%.” Well, your typical commercial construction contractor, if they have a 20% gross margin, 10% of the overall contract is 50% of your profit. If you took that model and applied it to any other business, whether it’s a restaurant or manufacturing or anywhere else out in the industry, and in any industry, where 50% of someone’s profits were held for upwards of a year until the project was finished, it would put stress and pressure on anyone’s business. So that’s something that’s very unique to construction and it causes a real problem.
Scott:
Secondly, the time between when you’re actually paid and you invoice, as we said, that can be as much as 60 days or even more. And then financing the project, you have a lot of developers or government entities and they all have financing sources. And those financing sources are the real money that’s on the job. So I like to relate it to those questions where you see, you go out past the construction site and you see all the bank signs out there that say proudly financed by XYZ bank, and proudly financed by such and such or in partnership with such and such bank.
Scott:
Well the reality is, is the subcontractors are the ones that finance the entire project. And why is that? Well, you incur your costs in real time, labor. You incur your supply costs in real time. Material has to be paid for in real time and none of that is in concert with when you’re actually paid. So by nature of just the reality of it, you’re financing the project. The bank that is financing the overall development is literally only doing that, and what they’re doing is reimbursing you for work that’s already been done. Are they taking risks? Certainly, but not nearly the kind of risks that I feel a subcontractor’s taking when they do the work.
Scott:
So what slows payment down? There’s a lot of things that slow construction payments down, some of which are out of the contractor’s controls and some of which are in the contractor’s controls. So the biggest thing is paperwork and documentation. Every single contract that’s given from the owner developer to a general contractor, and then the general contractor or subcontractor, has very specific rules around how you need to document invoicing, how you need to document the work, when the work is actually going to be accepted and then therefore able to be invoiced and paid, et cetera. What lean releases and waivers need to be given and when and on certain and specific forms. And then of course when those folks are paid and those, we call them sub suppliers and vendors or you’ll see an acronym there, SSVs, but SSV’s need to be paid based on the terms they give a subcontractor, which doesn’t coincide with when the subcontractor might actually be paid for the work. And so those are just some of the stress.
Scott:
The last and final thing is you can always have bad project owners or owners lenders, the bank that the developer or the owner used, et cetera. And it doesn’t necessarily because sometimes it can be bad people or sometimes they just bad and they’re doing bad things, but that’s a very small percentage.
Scott:
So back to the root of the presentation is your choice in a financial solution really matters and can impact you in really two main ways. One, having the financing available to you allows you to pay your sub suppliers and vendors. And that’s important because that way you can get material on the job site and you can get the vendors you need on the job site, et cetera.
Scott:
The other thing is it also helps you perform. When you have the money that you need to make sure you can follow a schedule that is most efficient for you to execute on your project it’s going to allow you to be able to do the work a lot better and a lot quicker and a lot easier. For example, if you have two crews of men on the job site, because it’s going to be the best way to do it, that’s great. Well, if you don’t have enough capital or cash to start the project, so you start with only one, then you start getting behind the eight ball out of the gate and that can hurt performance.
Scott:
We’ve come to realize that more than 90% of the problems related to performance on a job under any circumstances really leads back to a problem with cash no matter what. For example, the material isn’t here yet. Well why doesn’t material get there? We couldn’t order it. Well, why can’t you order it? We maybe you don’t have the right terms with the supplier and you don’t have the money for the deposit yet, so you have to kind of figure it out. You get only one crew on the job instead of two, so you get a little behind. All cash leads to performance and if performance falls behind, then all kinds of other stressors can come onto the job site. And those are the things that we really want to avoid.
Scott:
I’m going to give you guys a story, a real life story of one of our customers said. We have a customer, it happens to be out in California doing great work in a multi commercial property with multiple different scopes of work. But in a nutshell, they submitted over $250,000 of invoices in December and it’s now March 5th and they haven’t been paid yet. They only had 30 day terms. Well, come to find out the work was actually submitted and approved in December. However, our own subcontractor submitted invoices that included work that was not part of the contract scope, otherwise known as a change order. Well, the issue is they didn’t have a documented change order and they did the work anyway.
Scott:
So when you submit those paperwork for work that’s part of the contract just the administration documentation and paperwork is going to be unapproved by the lender. If the lender for the general contractor doesn’t approve the invoice regardless of whether the general contractor approves it or not there’s no documentation, they’re not going to be paid. So now they’ve gone 60 plus days out more than a quarter of a million dollars and now guess what? It’s March, 60 days later and there’s problems on the project.
Scott:
And those are the problems that can be avoided by our own client in this case or the subcontractor. And where your truth of a finance partner comes into play is when you pick folks that actually care about the overall project and want to look out for your best interests. Meaning, hey, if you’re going to do work that’s not part of the contract, either do it for free or put in a change order to start. And if you do decide to invoice that work, if you don’t have a signed change order yet, make sure you actually just invoice for the part of it that actually is part of the contracts so that you can be paid. Coming to us now in March with that problem makes it difficult for us to try to help.
Scott:
So let me back up and give you guys some options for what type of financing are out there for construction. So first and foremost you have traditional bank lines of credit. Those are the best. They work great if you can get them and we all know what they are. You can get an SBA loan. There’s a lot of great programs in the SBA right now and if you find the right SBA partner bank, you can really tap into some good resources.
Scott:
Invoice factoring. That’s basically, you get to an invoice and you can sell that invoice to a factoring company. They’ll advance you some percentage of the total invoice amount and it gets you some cash. That eliminates that 30, 60, 90 day period between the time you invoiced and the time you’re actually paid.
Scott:
An asset backed line or otherwise known an ABL line of credit. That is essentially another partnership with a bank where they will give you a line of credit that is a movable line. It floats about how much you can have outstanding based upon the amount of outstanding accepted AR that they have. And I accented accepted on purpose because you have certain accounts receivable, they will count as part of the borrowing base for which they’ll advance your money off of and some of it they won’t.
Scott:
Then you have merchant cash advances and then you have Mobilization Funding. So those are your sources. So we’re going to dive into each one a little bit different. Give you guys some good and bad, at least from our perspective.
Scott:
So traditional bank line of credit, those are going to be your lowest costs. They’re going to have very competitive interest rates. You can use them for anything, meaning if you get approved based off of your company. They’re not approving you off of your contracts or other stuff. They’re approving you off of your balance sheet, your financials, your tax returns, what you’ve been able to prove as a business entity, you are credit worthy enough to be lent money to from a bank. That’s just how banks work.
Scott:
The not so good is its very hard to get for construction companies. Most banks actually don’t lend to construction companies for some good reason, for them. Maybe no good reason, but it’s very difficult to get. There’s a very slow approval process. 90 days is probably the fastest, but it could be a lot longer. And then your potential growth is limited based off of your past performance. What do I mean by that?
Scott:
The bank is going to give you a line of credit that’s size based on how much credit they’ll give you is based on what you’ve done the previous two years. So if you’ve been growing very fast and you were a 2 or $3 million company or a 1 or $2 million company and you get approved for a line of credit, but you’re on pace to be a 4 or $5 million company, that line of credit isn’t going to do you a lot of good.
Scott:
An SBA loan. The good. It’s easier to secure than a traditional bank line of credit. There’s alternative programs out there that help and it’s backed by the SBA, which is good. Lots of different types of banks and partners. And it’s really important to know who you’re partnering with on your SBA loan. Not all SBA loans and bank sponsors are the same. It’s really important to know that. Also, those are typically found through a broker network and so who the broker you happen to be working with, who they’re partner’s with, really matters. So these are good questions you want to ask to find out before you just go to get an SBA loan.
Scott:
The not so good. You must qualify as a small business. It takes a long time and requires a ton of documentation and you’ve got to find the right bank and provider sponsor.
Scott:
Invoice factoring. The good. It definitely shrinks the time between invoice and payment. You usually can have a factoring company through their verification process get you money within five days after you invoice, maybe even the same day. It just depends. And you can work directly with the lender or in this case, not a lender the credit facility and the factoring company.
Scott:
The not so good. Very, very few factoring companies are doing anything with construction invoices mostly because of the nature of the progress payments and also because of the nature of the contract between the general contractor and the subcontractor. Their ability to essentially discount the invoice at some point.
Scott:
The not so good. It doesn’t solve your financial problem at the very start of the project when you really need the money, you can only access it once you invoice. It’s perceived to be a negative thing by a lot of general contractors. And the perception is that it also changes the contract terms between the GC and the subcontractor, at least as it relates to payment.
Scott:
ABL lines of credit they’re secured by your company assets, typically your AR, but it could also be equipment and other. You work direct with the lender. Those are all good things. The not so good. Very few also work with construction companies. It doesn’t solve your financial problem at the very beginning.
Scott:
Mobilization Funding. The good. It’s based on your contract, not your personal credit or the company’s credit. It’s based more on the performance. You get the money at the beginning of the job when it starts, your repayment structure is in line with your draw payments so you’re not hurting cash cashflow and you can work directly with the lender.
Scott:
The not so good. The money has to stay on the project. You have to use the money for the project itself, meaning you can’t get approved for the loan and use the funds for whatever it is you may want to use it for. Work and capital wise in the business and specific to the actual project itself.
Scott:
And then there’s merchant cash advances. So the good things about them, you get the money very fast. Nobody’s talks to your GC or customer, at least at first. And then in addition to that, you can work with multiple different companies and there’s a lot of options out there.
Scott:
The not so good. It usually comes at exorbitant rates. If you can get them for construction, you’re usually going to pay back upwards of 50% or more of whatever amount your given. The payment is not in line with your cashflow cycle. It’s either taken out daily or weekly in most instances. It can damage your ability to get other funding because there’s a lot of UCCs filed and it really hurts your personal credit. And merchant cash advances are really based on your personal credit and the amount of cash going through your business account.
Scott:
So why are MCAs, why don’t they work for construction? So first, anytime you’re borrowing money, you want to make sure you can pay it back. You also want to know what you’re going to use it for. So if you are a company like construction where you’re paid once per month, but you sign up for a loan or some type of … You borrow money that where it needs daily payments repaid. It only is a matter of time before you’re going to run into a real problem. So daily or weekly debit from your checking account just doesn’t fall in line with the cashflow cycle for construction. The MCA factor rates can equate to over triple digit APR rates. So it’s very expensive. So you may think, oh, I can get $50,000 today and I’m going to pay back 75,000, in a six month period or eight month period, but that’s almost 100% APR or high 80% APR.
Scott:
And then taking out daily on top of that is going to hurt your cashflow. So you need the loan because you have cashflow issues, but the loan itself is going to only make your cashflow issues worse by the nature of how fast they need the payment back. Just applying for an MCA can really hurt your personal credit. Most merchant cash advances are sourced through a network of brokers. Because they’re based on your personal credit those brokers shop those loans out to all the different lenders that are in that merchant cash advance space. And each time they shop that out, they pull your personal credit or they take a hit to the credit score or they pull a soft score and that actually lowers your overall credit score. So you can see, I’ve seen through our customers that have had merchant cash advances and have come to us, they’ve ruined some of their options at what they otherwise would have been able to qualify for from a traditional bank or SBA loan because they’ve lost hundreds of points in their personal credit scores, which can then take months to recover from.
Scott:
The nature and the security of the merchant cash advance and how they go about recollecting on those can be very, very aggressive. I’m going to tell you a story. We had a customer who’s been out of Texas. They were a commercial glazier, a commercial glazier putting in storefronts, aluminum, glass and et cetera. They, in about 2015 they started growing at a pretty rapid pace and grew from about 2 or $3 million a year to $5 million a year. And then in 2018 they started taking on some bigger projects. They got approved for bonding. And this is the business that was around for about 35, 40 years. It was a multi generational business.
Scott:
Well, from 2018 through 2019 they grew from a $5 million business to a $10 million business. And as you can imagine, that growth came with some stress. And part of that stress was bigger projects, more cash outlay up front. And where they had a good balance sheet and they did have bank line of credit. The bank line of credit couldn’t give them enough cash to help them manage that growth at the pace they were at. So they looked, one week they had some slow downs on a project, they were waiting for some checks that didn’t come in and all of a sudden payroll came around. And I’m sure this is something you all can relate to, payroll is important. You got to make those payroll payments. And that stress, they went to a merchant cash advance and they took out one and they made their payroll.
Scott:
Well, what happened was that one led to another one, and led to another one, and led to another one because of the nature of the problem that was on that project, one cash advance didn’t help them. And so a $5 million business that was very successful on its way to a $10 million business, within a matter of three months ended up with $2 million in merchant cash advances. They’re paying back more than $185,000 a month, having tens and tens of thousands of dollars a day debited out of their account from four or five, six different merchant cash advances.
Scott:
By the time we met them and tried to help, there was really nothing we could do. The cashflow was so bad. The merchant cash advance companies had contacted all of their customers and froze all of the payments and really, really tarnished their reputation. And then in addition to that, they came within days of having to file bankruptcy and almost losing the entire business. What they ended up doing is losing a lot of their credit, they were able to get one particular customer of theirs to pay them. And they had to forfeit basically on every other project they were on and somehow work out with their attorneys some kind of structured repayment on these merchant cash advances.
Scott:
So it’s just a horrible structure for construction. Merchant cash advances can be good for certain businesses if they’re appropriately placed. But for construction, you just got to stay away from them, they’re not good. And because it’s easy, easy on the front end doesn’t mean easy forever. Because as you can tell them that story, that’s not an easy scenario to be in. So sometimes it’s more important to deal with what might be hard, even in the moment to make sure you’re safe and protected. Because if you’re trying to get paid fast from your contractors and you don’t want to talk to your contractor about financing, you don’t want to talk to your contractor about having a finance partner, and so therefore you go to something that’s easy and it turns into a mess, well that doesn’t help you at all either. So keep that in mind when you’re thinking about the merchant cash advances.
Scott:
So having a finance partner protect you and work with you is important. A good finance partner will help you make sure you’re spending your money wisely and keep the money on the project. It’ll protect you from the lean leases and sub suppliers and vendors. You’ll get the cashflow earlier in the project when you actually need it, and someone that actually cares about the project itself. Because if they care about the project and you care about the project and the owner, developer, general contractor cares about the performance on the project, well then everybody’s in alignment. And when everybody’s in alignment, you have a much greater chance of success and that’s what’s important. There has to be something in it for everybody.
Scott:
And having that conversation with your general contractor because the reality is you do finance the project. Tell the general contractor, “Look, I have a finance partner. What does the finance partner help me do? It helps me finance the whole project. How do you think I perform great work? How do you think I do these things? How do you think I’d get out several hundred thousands of dollars on a project and deal with 60 day payment terms and 10% retainer to be an out? I mean, I don’t have a money tree. Of course, I have a finance partner.” And just own it. Just accept it.
Scott:
Everybody knows the reasons general contractors don’t hire all the trades in house as direct employees is because guess what? They may have to finance it. So the way they finance that overall job is they hire sub contractors. And it’s all okay. Nobody cares. What general contractors hate, and let me give you an idea.
Scott:
We’re an approved lender through all the large general contractors. Your Turners and your Skanska’s, and Beck Construction and all of the folks out there, we’ve worked with them all. What they tell us and when they refer their subcontractors to us, they tell us that they love having a subcontractor come to them and talk real. Like, “Hey man, we can’t finance every job. We don’t have endless supplies of money.” That when they hear from a sub that they have all the money and they got it covered, it scares them to death because they know that’s not true. They know it’s impossible that to have someone to be able to deal with this kind of cashflow environment and not have some type of partnership for cashflow.
Scott:
So when you go to them in advance and tell them you do have a finance partner and “Hey, by the way, I have a finance partner and this is what’s going to help me perform. And this allows me to be able to perform for you.” They’re going to be more likely to help work with you. And the more performance you have, the more financially responsible you are, the more projects you’re going to get, not only from that sub contractor or from that general contract but from others. And then that puts you in a great position to grow.
Scott:
So I hope you guys have found this presentation to be helpful today. It’s certainly our intent to be here as much as we can. And I think we have some time for some Q&A now too.
Michael:
Yeah, that was great Scott. If any of the audience members have questions, go and enter those in the chat box now and we’ll read those out loud as they come through and get those answered. So we’ll give a minute or two to have the questions come in. Actually, we just had one come through.
Michael:
David asks, Scott, how does it work with deposits?
Scott:
The deposits for? I’m not sure exactly which deposits, but I’ll answer it both ways at least if from what I know. Deposits that come from the general contractor first to start the job is one. And if how does it work? Meaning that money comes in if it’s related to the project and it’s used for the project, great. That helps get you started of course. If you’re asking that question specifically to how does Mobilization Funding work, we treat it just like it would be part of the contract, just like it’s a cost. But in this case it’s actually part of the contract that was already paid to you. So we would treat it like it was paid to you already and we’d want to know how to use of funds was. And then we would supplement that to help you with whatever gap was needed.
Scott:
For deposits if you’re related to like supplier payments that you need to make and they have a deposit that you have to put down first and then you can pay the balance of the material costs when you’re paid, that’s certainly a use of funds that we would cover with our mobilization loan program and we would treat that just the same as any other costs.
Michael:
Thanks Scott. Any other questions from the audience? Okay, we have an anonymous question from the audience come through. What is Mobilization Fundings sweet spot? Is it the Southeast only or is it nationally as well?
Scott:
So geographically we work all over. We have offices in South Carolina and Florida. We’ve done loans just about in every single state. I wouldn’t say we have a sweet spot geographically. I would say we have sweet spots in certain trades that seem to work with us more than others, but we’ve covered the entire spectrum A to Z from trades as well. All parts of the project, all parts of jobs. We do work primarily on commercial construction projects or commercial subs.
Scott:
That doesn’t mean that if you’re building a multifamily residential complex like an apartment complex, we certainly, we’d look at that as a commercial project, but there is no specific geographical part that we stick to or block or any anywhere that’s blacked out. And there’s really not many trades that are blacked out either. We work pretty much, worked around with everybody on the last six and a half years.
Michael:
Great. Here’s another question that came through Scott. How does a contractor apply?
Scott:
Easy. Great question. We have on our website you can apply directly there. Our process really for application, we believe it’s great to have a face-to-face either on a zoom call like this or at least talk to a live person. So we like to offer our customers the ability to talk to us for 5, 10 minutes to at least give us their overview of what they want to do, how they’d like to do it, what their problem is. So that they at least feel like if they’re going to submit some information or documentation to apply then it’s worth it to them. We’re sensitive to the fact that a lot of our customers complain because they’ve gone to so many different financing sources and submitted documentation after documentation, after documentation just to have everyone say “No, can’t do it.” So we really try to avoid that.
Scott:
So contacting us, you can fill out any of the forms that are on our website and it’ll immediately come in to us and we can schedule a call with you. Otherwise, you can formally apply right on the website, fill out the application, submit the documentation that’s on there and it’s very easy to do. You can do that and find those on the website by: mobilizationfunding.com. And just follow the links from there.
Scott:
Documentation wise, it’s pretty easy. From an application we have some four or five basic documents to submit that are easy. Just based off of your business to get your business qualified first. And then if the business qualifies, which is really based off of just time in business, what the project looks like, and really do you have a proven record of being able to do the work that you’re have been contracted to do?
Michael:
Great. We have time for one more question and then we’ll get your closing thoughts after that Scott. The last question is, do you need to come to job sites before approvals and do you monitor projects in real time?
Scott:
Good question. No, we don’t need to come to job sites prior to or during. We have done visits to see our customer but not to necessarily the project itself. And what was the second product question Michael?
Michael:
The second part is how do you monitor real time the project?
Scott:
The nature of the project itself is really tracked through the progress billing on the standard AIA documentation. So how we track it is pretty much through the communication with our sub, the way they’re going to base our customer, how they’re basing their performance, what they’re telling us. And then we marry that up to what they originally planned from the schedule. And then of course once you submit your invoice that’s what you’re invoicing for. If that’s accepted then we track it just like that. Really no different. We don’t require or need to do anything different then what’s already required for the job.
Michael:
Great. That was a great question. And I appreciate all the audience’s questions. Scott, if you have any parting thoughts, go ahead now and then we’ll close out the session.
Scott:
I just want to thank you guys at Levelset, I’ve enjoyed participating in the website. I really enjoyed answering the questions. I try to answer as many as I can or at least the ones I think I can provide value to. There are quite a few legal questions on there and I’m not a lawyer. I can always give my practical experience because in the last six years I’ve probably seen more than I care to see in terms of problems and solutions though. So anytime I can share those or anecdotes I do. And so I appreciate you guys giving me the opportunity to do this a lot and I think there’s a lot of value there. I’ve had my own customers come to us and say, “Hey, thanks for putting us on Levelset. We’ve got a lot of value out of that, whether it’s from the legal perspective or just collaborating around.”
Scott:
And then I hope this presentation has worked out for you guys. We’re very passionate here in what we’re doing. We want to bring a financing solution to the construction world that works and fits. Are we perfect? Does everybody like everything we do? No, not all the time. But they do like, after the project goes well, they do really like say, you know what? It was great to do a project without having to worry about payroll. I wish I could have used the money for whatever I wanted to do, but it was great not having to pay suppliers and worry about my suppliers and get my men paid. And I’ve actually had, it’s been a long time if I can ever remember that I’ve actually gone through a project without the stress of payroll every week or managing cash. And so I really appreciate those constraints you guys put in place and you’ve been a good partner.
Scott:
And I hope this presentation is able to give you guys an idea of being able to do that, but also enlighten you to some of the other options that are out there. And if you don’t take anything else away from this, I just want you to take away the fact that merchant cash advances are horrible for construction. And I really want you guys to consider all your other options out there prior to taking one because easy is not always easy.
Scott:
So Michael, with that, I’d say thank you very much.
Michael:
Thanks Scott. And thanks everyone for joining. In addition to that, if you have any other construction payment questions, feel free to visit Levelset’s website and you can post questions in our experts center for free. So I appreciate everyone’s time. Scott, thanks again and hope everyone has a great close of their week.