If you are a contractor who runs an insurance restoration business, you probably are feeling the cash crunch. The industry is notorious for being slow in processing payments, as the Loss Payee’s can be very frustrating to work with. If you are a contractor that is currently struggling with cash flow difficulties, you have undoubtedly considered taking out a loan at one time or another. Rest assured you are not alone, 83% of contractors report having cash flow issues. Delays in receiving payment is a part of this industry. When you’re taking on large projects or just experiencing growth, there never seems to be enough money in the bank. Seeking financing through loans or credit cards can often be overwhelming.
Like any good business owner who is considering borrowing money, you want to make sure you do it in a responsible manner, but what does that mean, exactly?
The team at Greenlock has put together this borrowing guide to help contractors who are considering taking out a loan to help with cash flow issues. We’ve addressed commonly asked questions and offer our advice for contractors looking to borrow money responsibly.
Does Your Company Actually Need Funding?
Even if you are feeling the pinch financially, it doesn’t automatically mean you should take out a loan. First, you need to understand how much working capital you currently have available. Working capital is defined by cash on hand, available credit, and your accounts with material suppliers. Based on our historical data, contractors need to have about 40% of the capital for any given project in order to efficiently carry out the contract.
You must also remember to maintain at least 3 month living expenses. As business owners you have taken a significant risk to follow your dream. It is not easy and you often place yourself last. This can often have devastating effects on your personal life. So, it is very important to always maintain a safety net that is not related to your families well being
Borrowing should be initiated on projects when your total work that needs to be completed exceeds your working capital.
How Can You Make Sure You Are Borrowing Responsibly?
Once you understand your capital needs (see above), you should identify your gross margin on the project for which you are seeking funding. The cost of money can be very expensive. This means that you must operate on a healthy margin and understand that as you borrow money, your bankers become your silent partners. Credit cards and commercial trade accounts are a great source of financing. Once you are tapped out on these you can then seek out loans or Greenlock.
You must keep track of all your financing costs and book them to the individual projects. Then, you can add the cost of borrowing capital into your budget to identify if you can responsibly borrow and still have sufficient margins to run your business.
When Should You Apply for Funding?
This may sound odd, but contractors should secure funding before they actually need it. In a typical scenario, contractors don’t start the process of securing a loan until they’ve run out of money or are just about to. This can be a mistake. Your credit score and business financials often look best when you don’t need money.
It’s always a good idea to get pre-approved for financing when your company isn’t already in an emergency situation. The primary reason for this is, your financial condition is usually better when you aren’t in a crisis, and therefore it may be easier to qualify for funding. If you wait to get approved until the situation is dire, your financial ratios will be skewed and you’ll show higher debt and less cash on hand, which makes you “riskier” in the eyes of a lender.
By getting pre-approved ahead of time, you’ll be able to access cash quickly when you do actually need it. At Geenlock, we understand that many people don’t seek financing until after it’s too late. We look beyond the numbers and take the entire situation into account.
What Type of Loan Should You Get?
Our experience shows us that general small business loans and bank financing options are typically very limited. Here at Greenlock, we have tailored our loans specifically to the restoration contracting industry. We currently offer Accounts Receivable Financing and Project-based Loans, both of which are well suited to the nature of the industry.
Our knowledge of the contracting industry makes us a true financial partner to insurance restoration contractors. Not only do we provide financing, we perform a full financial analysis of each business and assist business owners in developing good financial practices that will benefit their companies long-term.
What If You’re Already in Debt from Borrowing?
If your company has already taken on a significant amount of debt, the first step is to contact us to do a thorough evaluation of your company’s finances. We can help you establish a plan of action to move forward and reduce your debt and monthly expenditures. Once there is a plan in place for debt reduction, we can help you determine if a financial tool from Greenlock can help you as you move forward. We can assist you in overcoming your cash flow challenges, and by working together, we can increase your ability to execute on future contracts. We have many amazing stories of companies that have overcome a large amount of financial debt and have gone on to see great success! (You can see some of our success story videos here.)
Contact Us for More Information or to Get Started
You likely have other questions we weren’t able to address in this post. We are happy to answer them for you! Contact us to schedule an appointment with one of our helpful and knowledgeable team members who can answer all your questions or get you started in the loan application process.