How General Contractors Can Address Working Capital Concerns and Grow Their Business
The last few years have been volatile ones for contractors. Construction is already an inherently up and down business, with peaks in the spring and summer and slowdowns in the colder fall and winter months. Add to that the Covid-19 pandemic, a tight labor market, and massive supply chain disruptions, and you have a recipe for disrupted project and payment timelines.
Amidst this chaos, it can be even more difficult to manage your working capital and to keep the cash you need to finance your business on-hand today than it ever has. But general contractors have options to address the working capital needs of their business.
Working Capital Review
Before we evaluate the different options contractors have to address working capital concerns, it is important to define working capital and its relevance to your business.
Net Working Capital = Current Assets - Current Liabilities
For general contractors, your current assets include not only your cash on hand, but also assets that can turn into cash within the next 30-60 days such as current accounts receivable or near-term invoices on project work that might pay quickly. Your current liabilities include any vendor accounts payable, upcoming payroll liabilities, credit card balances, near-term debt payment obligations, or the current portion of other liabilities your business needs to make payment on such as monthly lease, equipment or vehicle payments.
What remains is your net working capital, which represents the expected liquidity or cash flow you have available to fund the daily operations of your business in the short-term. In a general contracting business, Net Working Capital is one of the most crucially important metrics, and when you further analyze this as a percentage of your revenues, you gain a good picture of your business’ financial health.
For example, if you have $1 million in working capital, and $10 million in annual revenues, you have a 10 times factor. If you have $30 million in annual revenues, that is a 30 times factor. Ideally, general contractors will operate around a 20 factor to ensure strong but stable performance.
Secured vs. Unsecured Loans
Now that we’ve reviewed the importance of working capital to your business, we can evaluate your options if your working capital levels are too low. At their core, your options fall into two buckets: secured and unsecured business loans.
Unsecured small business loans don’t require you to put up any collateral, and are mostly based off of the financial profile and credit report of the applicant. Options include business lines of credit or a standard business loan.
Secured small business loans are backed by collateral, like real estate, equipment, inventory, or future receivables. Examples include equipment financing, merchant cash advances, or inventory loans.
While general contractors have many options for financing and payments processing, many are discovering the power of GoBuild to grow their business. GoBuild advances the funds for your next project so that you can get a headstart on materials purchasing, subcontractor payments, and retain a stronger working capital position, all with flat-rate fees as low as 3.5%. GoBuild also handles payment collection from the homeowner.
GoBuild has a clear and easy application process which screens for serious crimes, fraud, and other red flags. After you are approved, you can submit your next project and GoBuild will release up to 65% of the funds for the project immediately. When you consider that against the standard 10-30% you might otherwise receive from a homeowner, it’s a large improvement which will bring you much more peace of mind and flexibility to get the job done quickly.
An added benefit of using GoBuild is that homeowners only have to put around $500 down to start the project. This can be an amazing marketing opportunity and a unique selling point, especially for contractors in competitive areas.
With all of the options available to general contractors to finance their business, it can be hard to decipher what is the best choice to grow your business. With GoBuild, you can get quick access to much-needed capital for low fees and offer homeowners a uniquely low down payment. This will empower you to grow your business to new heights and to retain great working capital!