As the country slowly emerges from the pandemic, opportunities within the construction industry are looking good—but a lack of sufficient cash flow could stymie contractors, according to an industry survey report by Billd, an Austin, Texas-based contractor finance company.
“While the survey found that construction contractors have maintained an optimistic entrepreneurial spirit despite the obstacles of the COVID-19 pandemic and economic challenges like skyrocketing building material prices, the data also suggests that ongoing cash flow problems will likely prevent many from achieving their business growth goals in 2021 and beyond,” Billd wrote.
The company surveyed 572 general contractors and subcontractors in commercial construction and found that nearly three-fourths said they plan to grow their businesses in 2021. While 44% believed they would use cash on hand to finance these goals, 46% said they struggle with cash flow issues.
“The responses call attention to persistent construction industry challenges that prevent business growth, including a lack of access to capital, inconsistent payment cycles and the insufficient length of supplier terms,” Billd wrote.
When asked to select their most common method for purchasing materials, contractors showed considerable reliance on supplier terms. A significant majority (89%) had terms with suppliers, and 70% of contractors polled preferred supplier terms over credit cards, cash or bank loans. However, nearly half (49%) do not believe their terms are sufficient.
“Despite their overwhelming popularity as a payment method for materials, supplier terms do not offer contractors the flexibility they need to grow into larger or more complex commercial projects,” Billd wrote. “Supplier terms also cost contractors money and minimize negotiating power. They bring underlying costs, not immediately visible to the contractor.”
Suppliers tend to offer cash discounts or options such as 2/10 Net 30, though they are “essentially fees when utilizing the terms,” according to the report. It typically takes around 60 to 90 days for contractors to get paid for their work, much longer than supplier terms, which is the “ultimate shortcoming” of the payment method.
While about half of contractors said they were generally satisfied with their supplier terms for financing construction materials, 63% have to pay for materials before getting paid for their work. To cover the gap, contractors preferred to rely on credit cards, followed by bank loans, equipment leases and loans and private lending.
“Interestingly, there’s an inverse relationship between price and preference,” Billd wrote. “The higher the cost, the more favorable contractors seem to be. This is likely due to the simplicity and ease of use of the product.”
Indeed, 38% of contractors reported that they rely on credit for everyday business expenses, such as equipment, materials and payroll.
“This is problematic, contradicting the best practice of keeping credit lines reserved for emergencies,” Billd wrote. “Payroll, equipment and material purchases are sizable expenses that quickly eat into a contractor’s credit line. In the event of an emergency, they may not have the credit available to overcome it.”
The lack of subcontractor credit options “presents a ripe opportunity for new companies to charge into the industry to offer credit options tailor-made to the industry needs,” the report stated.