The Importance of Working Capital for Construction Companies

Working Capital for Construction Companies

Access to working capital plays an indispensable role in a business’s survival and growth. To ensure there is always cash in hand, proactive companies use elaborate cash flow forecasts to determine what they need money for and when. Some also rely on relationships with a construction equipment loan provider to spread out the initial cost of any equipment investments they need to make.

Why Your Company Needs Working Capital

The importance of any asset in business is directly tied to why you need it. Take a look at your monthly expenses, how they increase when you take on a project, and then begin your calculations to get a monthly figure.

  1. Permits: Not all projects require permits, but those that do tend to be more costly. As you already know, permits can cost anywhere from as little as $100 to a high of $7,500. The national average is roughly $1,221, and having the money to pay for that is essential.
  2. Payroll: Some jobs are so small that you can handle them yourself, but most of the time, you’ll need workers. These workers may also bring specific skills to the table honed by years of working in that industry. Some of these professionals include roofers, electricians, and plumbers. You’ll need working capital to pay for wages as the project unfolds.
  3. Transportation: How far is the job site from your business? Both yourself and your workers may need to travel a few miles to get there. Work trucks are often gas guzzlers, even when not loaded. When hauling lumber or towing a utility trailer, the cost of transportation rises significantly.
  4. Material: The material that gets delivered to the site also needs to be paid for. If you have a longstanding relationship with a local supplier, you might get these materials on full or partial credit. However, the bill does need to be settled at some point, and maintaining working capital through timely disbursements of funds makes it happen.

Consequences of Inadequate Working Capital

getting a working capital loan paperwork

Whether through improper planning or unforeseen challenges that exceed even the contingency budget, sometimes a company doesn’t have enough working capital to finish the project on target. If this has never been the case for your business, here are some effects to be mindful of:

  1. Change Orders: Change orders ultimately cost both parties something. Even when you’re able to charge the client for the additional expenses, you both lose time, and you lose their trust.
  2. Project Delays: Whether the client fails to pay on time or you come across an expensive new issue, project delays are inevitable when there is not enough working capital. 
  3. Client Dissatisfaction: All of these issues may affect client satisfaction. If this frequently happens across all clients, it could affect the business’s reputation as well.
  4. High-Interest Rates: Ideally, you can get preapproved for a working capital loan ahead of time or have capital set aside. If not, you might feel forced to take the first loan you get, which could lead to high-interest rates.

How To Secure Working Capital

securing working capital loan

If the client is not the cause of the working capital shortage, it might be time to consider a working capital loan. Do your research before choosing a specific bank to work with. Verify rates and terms to see what best suits your company’s needs.

Some lenders may be more flexible than others when it comes to terms and rates, so using only the information on the company website could cause you to miss out on great opportunities. Always call or shoot them an email. Visiting in person doesn’t hurt either.

If new equipment is the reason you need more capital, then consider construction equipment financing. This gives you more time to repay the loan because lenders understand it is an asset. Most lenders use that asset as collateral, which tends to lead to lower interest rates.

How To Get Preapproved

At First Capital Business Finance, we understand that construction is a high-risk business. When project and funding delays occur, this can make it difficult for you to meet immediate financial obligations. Paying your workers is one of the biggest concerns you may have when you have a cash shortage.

Working capital loans and construction equipment financing are just some of the ways construction companies ensure they have enough cash in hand to cover monthly obligations. Give us a call at 888-510-3573 to get prequalified for your business cash advance today.

The Importance of Working Capital for Construction Companies | First Capital Business Finance



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