Construction Finance Experts Give Emergency Coronavirus Advice

With the construction industry in crisis over COVID-19, business owners and field workers alike are nervous. Even in places where construction is considered an essential business, developers and lenders aren’t investing in a lot of new construction right now. Everyone in construction is afraid of what the future holds – and whether they will make it through to see the other side. We asked 6 experts in construction finance for advice to help contractors and suppliers survive the coronavirus, and the looming recession. Not surprisingly, their advice boils down to one thing: CASH.

During COVID-19, cash is business critical

Cash flow is king in construction, and that’s never been more true than during the COVID-19 crisis.

“Cash is the number one concern for construction businesses right now,” says David Lee, a Business Development Officer with Evergreen Working Capital in Baton Rouge, Louisiana.

“Cash is the number one concern for construction businesses right now.”

David Lee
Evergreen Working Capital

When the future is so uncertain, making financial plans is incredibly tough. No one knows how long the quarantines and stay-at-home orders will last. As a result, everyone in the construction industry is trying to get their hands on as much cash as they can.

Once the federal government irons out the kinks, most construction businesses will likely be able to get up to $10 million in forgivable loans from the SBA’s Paycheck Protection Program. That will help a lot of companies meet payroll expenses and cover utilities.

But right now, contractors shouldn’t be relying on a single source of funding to get them through this mess.

Contractors should look for capital everywhere

If your construction business has been around long enough, you’ve probably survived some hard times. Chances are good that you know one or two ways to get cash when you need it.

Maybe you have a relationship with a bank loan officer you can call to open a line of credit when you need it. Or maybe you’ve paid your utility bills with a credit card for a few months so you could keep the cash in your checking account.

“Freeing up cash flow is more critical than ever.”

Mike Ross
Partner, Miller, Ross & Goldman

But if you limit your financial options right now, you might not have any left next month. Cash is drying up quickly for construction companies – and the contractors that take advantage of every opportunity are most likely to be standing when it’s all over.

Pursue collections on overdue accounts

According to Mike Ross, Partner at Miller, Ross & Goldman, the coronavirus has changed the cash flow game for construction businesses.

“The future of construction during and after the COVID-19 crisis is uncertain,” says Mr. Ross. He suggests taking a long, hard look at your accounts receivable (A/R). “Reducing your DSO and freeing up cash flow from distressed A/R is now more critical than ever. ”

Now is not the time to be shy about collecting overdue debt. The survival of your business is at stake. After all, when your customer delays your payment, you can end up carrying a substantial cost.

“Each day that you wait for payment is another day that you’re funding your customer’s business,” says Steve Rauch, President at Rauch-Milliken International, Inc. “Now is not the time to wait and hope that you’ll get paid. Contractors need to take steps to collect on overdue accounts, and fast.”

“Each day that you wait for payment is another day that you’re funding your customer’s business.”

Steve Rauch
Rauch-Milliken International, Inc

Of course, collecting on past due accounts doesn’t require being a jerk. Mr. Rauch will be the first to tell you: Sometimes, and especially during the coronavirus pandemic, collecting on past due accounts requires compassion. Your relationship with your construction customers is still important – no one survives a crisis alone.

“If the delinquency is because of COVID19 and you believe the customer will survive, then hold off placing for collections,” says Mr. Rauch. “But if the delinquency was prior to COVID19 their problems are probably getting worse, so you must act sooner than later.”

Use invoice factoring to free up cash

“In order to survive the current COVID-19 crisis, it is more important than ever to turn your accounts receivables into cash,” advises Frank Skelly of FK Construction Funding.

“It is more important than ever to turn your AR into cash.”

Frank Skelly
FK Construction Funding

For contractors that are unfamiliar with factoring, invoice factoring can help construction businesses turn their outstanding pay applications into cash.

In 2019, the average days sales outstanding (DSO) was 83 days. That’s how long it took the average construction company to get paid after they issued a pay application.

Factoring is different from collections, which typically require the account to be past due. Instead, factoring companies pay you for your invoice as soon as you issue a valid payment request. It can eliminate the need to wait for up to 3 months for that money to hit your account.

If work is still continuing on your construction projects, and you continue to submit invoices or payment applications, factoring may be a great way to get cash before funding sources dry up entirely.

Use mechanics liens to make your payment a priority

Getting paid in construction was already a long and difficult process before COVID-19. Now, project delays are throwing payments into question.

“The biggest risk is the uncertainty of the situation,” says Mr. Skelly. “Nobody knows for sure how long this is going to last nor do we know what the industry is going to be like once we get through it.”

Fortunately, construction businesses have a pretty powerful tool that’s already in their tool belt: the mechanics lien.

“If you are waiting for a payment on any of your construction projects right now, filing a mechanics lien immediately moves you to the front of the line to get paid,” says Michael Williams, Manager of Financial Services for Levelset.

Filing a mechanics lien is business critical during coronavirus. The contractors and suppliers who hold a mechanics lien claim on a property have an enormous advantage over their counterparts who adopt a “wait-and-see” approach. If the project funding dries up, and there’s a limited pool of funds to pay the subs and suppliers, who do you think is going to get paid first?