Construction Company Bookkeeping For Contractors All Across The USA Including Alaska And Hawaii

Tips For Working With Banks And Lenders In The Construction Industry

Written by Sharie DeHart | Fri, Sep 06, 2024

If your company is experiencing rapid growth, you might find yourself navigating a good news/bad news situation: while your sales figures climb, managing cash flow becomes increasingly complex, pushing you to seek additional financing to meet the rising demand.

Consider this scenario: A couple wanting to sell their house expresses interest in your remodeling service, presenting an exciting opportunity that could significantly elevate your construction business.

However, they have a requirement: they want the job done in three weeks.

Now, you're caught in a challenging position. Declining could mean missing out on a lucrative partnership, yet agreeing could strain your cash reserves.

You're not alone in this struggle; many businesses face similar hurdles when scaling operations or entering new partnerships, especially when balancing cash flow and the cost of fulfilling the project on time.

 

To build a stronger case when approaching your financial institution for support, it's essential to understand how bankers think and what they look for in terms of business viability. A solid business plan is just the beginning; you must clearly outline your financial needs and establish a robust strategy highlighting your project's viability.

Here are some practical tips to help you prepare for that crucial conversation—and improve your chances of a successful outcome.

Understanding your financial institution

Understanding how financial institutions—such as national banks, regional banks, credit unions, and other lenders—operate is essential for enhancing your borrowing potential.

Here are some fundamental operating principles to consider:

1. The difference between being bankable and lendable.

Every entity with financial records is bankable: you can open a business account, deposit revenues, and pay bills. However, to be deemed lendable, you generally need at least three years of financial statements and tangible assets, inventory, or accounts receivable to serve as collateral.

A minimum risk rating is also required. Understanding your company's financial performance is crucial before approaching your banker for additional funding.

2. How financial institutions evaluate creditworthiness.

The approach that financial institutions take to assess creditworthiness is constantly changing. Evaluating a business often involves several decision-makers, so bankers may use a behavioral-based model to determine your credit score. This score typically merges performance metrics from businesses within your industry and assesses your business's history with the current financial institution, which includes factors such as borrowing and repayment patterns, cash cycles, and customer payment terms.

3. Banks often don't value foreign assets.

Many banks need help assigning value to overseas assets, including foreign accounts receivable. The reason for this caution is straightforward: if repayment issues arise, banks face challenges in recovering losses when collateral assets are internationally situated. This situation can lead to reduced financing possibilities and limit the size and number of contracts your business can manage simultaneously.

4. Competition for loan dollars

When you seek financing from your bank, remember that you are competing with other businesses for the same loan funds. Therefore, it's vital that you present your case clearly and persuasively. The following section outlines the essential elements you need to include.

5. Time constraints of account managers

Your financial institution's account manager likely balances a diverse portfolio of clients, each with distinct needs and business backgrounds. To ensure a successful meeting, providing a concise business plan and well-presented financial statements will significantly enhance your chances of a favorable outcome.

Essential documents to take to your lender

With an understanding of how banks operate, it's time to prepare your documentation and refine your pitch.

1. Define your request

Clarifying your financial request is crucial. Take the time to outline precisely what you need from your financial institution. Whether it's bridging the gap between supplier payments and customer receipts or funds to secure materials for a significant contract, presenting your pain points will aid your account manager in determining the appropriate financing solution—a loan or line of credit.

Keep in mind that loans provide a limited credit amount that must be repaid in full, while lines of credit offer revolving access, allowing for continuous borrowing within a predetermined limit.

2. Compile financial statements

Financial institutions generally favor established companies with a history of economic stability. Aim to have at least three years of financial statements ready to demonstrate your business's viability. If your business is newer or has unusual financial trends, be prepared to share future projections that reflect your anticipated growth. For younger businesses, pursuing financing for specific transactions can enhance your credibility.

3. Evaluate your collateral

For small business lines of credit, banks typically require $2 in collateral for every $1 financed. Understand what collateral you can offer, including capital assets, inventory, or accounts receivable.

Capital assets consist of real estate and equipment, which banks may be reluctant to accept due to liquidation challenges.

Inventory - this can be used at a discounted valuation, depending on its quality and turnover rate.

Accounts Receivable: Domestic receivables with short payment terms may be accepted, while international receivables are often unsupported.

4. Perfect your pitch

With your understanding of the bank's considerations, ensure your pitch stands out. Develop a well-prepared presentation that balances enthusiasm for your construction business with sound financial planning. Your banker will appreciate your passion, but they'll also seek reassurance that you have a strategic plan. Be ready to discuss the reasons behind your working capital need and the unique aspects of your business that set you apart.

Additionally, if you aim to enter a new market, prepare to articulate the associated risks and benefits and your long-term vision for growth.

5. Mitigate your bank's risk

To improve your chances of securing working capital, demonstrate to your bank that you understand and can mitigate their risks. They will need confidence in their ability to recover funds if repayment becomes an issue.

Following these guidelines will enhance your approach to securing financing from your financial institution, ultimately positioning your business for sustainable growth and success.

In Summary

What can you expect from us?

Banks typically require several documents from a construction business to approve a loan. These may include:

1. Profit and Loss Statement - overviews the business's profitability.

2. Balance Sheet - shows the company's assets, liabilities, and equity at a specific point in time.

3. Business Plan - details the construction company's operations, market analysis, and financial projections.

4. Tax Returns - typically, banks ask for the business's tax returns for the past few years.

5. Projected Cash Flow - provides insight into the company's ability to repay the loan.

6. Business Licenses and Permits - banks may also request documentation showing that the business operates legally.

We can help you with these standard requirements when you become a client, but remember that specific documentation needed can vary based on the bank and the loan type. It's always best to check with the lending institution to ensure all required documents are provided.

As always, I'm just a phone call away for a no-charge business consultation.

PS 

We offer free resources to help you save time and money that you can download and print now. 

About The Author:

Sharie DeHart, QPA, co-founded Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations. She offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com

 

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