Why Contractors Should Offer Low Down Payments

Hugo Pegley
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July 20, 2022
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Informational
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Down payments are often a subject of contention on construction projects. Some think it's fair for contractors to require higher down payments, while some homeowners believe that contractors should finance their own business or pay for materials required from their pockets. 

While it’s reasonable for contractors to get a substantial down payment before starting a project, there are actually some advantages towards only asking for low down payments. This article unveils some of the reasons why low down payments might be beneficial to homeowners and contractors.

Why Do Contractors Ask for Down Payments?

If you've not worked with contractors before, you might be surprised when they ask for a down payment even before they work on your project. It seems counterintuitive to pay for services that have not been rendered. Nonetheless, the following are reasons contractors will want a down payment:

  • To pay for materials
  • Pulling permits
  • Labor
  • Assurance that job will be paid and that the client is serious

The good thing about down payments is that you can agree to meet halfway. If you're working with a licensed and reliable contractor, you should be able to negotiate for low down payments. In most cases, down payments assure contractors that homeowners will meet their end of the bargain once the project is completed as they “skin the game.”

Typical Down Payment in Different States

One main reason down payments are always an issue is because contractors and clients have varying perspectives about what's considered fair. A contractor will argue that they need to pay for equipment, materials, and labor. They assume that it's not their duty to finance the project costs from their own pockets.

Conversely, clients (usually homeowners) think that it's not their job to finance contractors' businesses and that they should not pay much upfront for work that hasn't been delivered.

Reasonable down payments take into account both sides. It's crucial to strike a balance where both parties benefit from the contractual agreement. They should share the risks and costs involved in the event the project runs into problems or if it ends up incomplete for any reason whatsoever. No one wants to be left holding the bag if anything goes wrong.

For instance, in California, down payments are limited to 10% of the project's estimated cost or $1,000, whichever is less. Payments made thereafter should be for services rendered, work performed, or materials delivered to the site. What this means is that a contractor should have good enough credit credit enough to purchase the required materials and pay subcontractors from their pockets.

In Maryland, the Maryland Home Improvement Commission (MHIC) stipulates that contractors can't accept anything more than a third of the contract price as a deposit. Contractors are also required not to accept any down payments until the contract is duly signed. The project's total cost should also be clearly stated, including the down payment. The contractor and the homeowner can negotiate the down payment (deposit) amount.

Why Low Down Payments Are Good To Offer

While contractors might think that low down payments don't favor them, the opposite can be true. Asking for low deposit amounts can help contractors in many indirect ways.

Land More Jobs

Typically, homeowners don't want to get the impression that they are financing a contractor to do their work. Asking for high down payments only makes them feel like they are giving contractors the working capital they need to offer their services.

What's more, homeowners consider it a red flag if a contractor doesn't have credit with subcontractors or suppliers. Sure, you may have all the right reasons to ask for a specific amount of down payment, but asking for a huge deposit might be misunderstood.

Low down payments can give contractors the benefit of landing more jobs. Clients feel that the contractor is confident and competent enough to offer their services with a small advance payment.

Lower Risk for Homeowners

High down payments may give homeowners the impression that they are bearing the entire risk of the project. If anything goes wrong or the contractor skips town, they will be on the losing end.  Contractors should offer low down payments if they are confident they will deliver. A small deposit from a homeowner should be considered an act of good faith. They are more likely to pay for work done once the project is completed.

How To Manage Risk With Lower Down Payment

Evidently, offering low down payments will be beneficial to any contractor. The following tips should help you mitigate common risks when offering low down payments and to ensure you remain in a strong working capital position.

Use A Secure Payment Platforms Like GoBuild

GoBuild is a financial technology company which provides financial tools for contractors to grow their business. GoBuild ensures that you worry less about managing your finances and focus more on building. It helps in avoiding everyday client payment negotiations. You can offer your services knowing that you will be financed with the money you require to do your job.

GoBuild also guarantees that you get funding on the same day for change orders. Plus, the platform ensures you get paid right after completing the project without haggling with homeowners. 

Protect Yourself With a Lien

Luckily, contractors can protect themselves when homeowners fail to pay for services rendered. Legally, a contractor can file a mechanic's lien against the owner. The lien filed affects their credit score. They won't be able to sell their property or ask for a loan without paying off the lien.

Final Thoughts

Contractors are always on the lookout for jobs. Unfortunately, this can be an issue if you require high down payments. Asking for low down payments can lure clients into relying on your services, not because they find your services cheap, but because they have confidence in your ability to deliver. So, offer low down payments and find ideal ways of mitigating your risks by using GoBuild.