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Small Construction Firms: Avoid These Four Trouble Spots
First Bank’s Travis Bailey helps a variety of small businesses with their financial needs, including small construction firms – the kind that might build 20 to 25 homes per year, or construct local residential leasing complexes. We recently spoke to him about four financial trouble spots for small construction firms.
1) Not having enough cash on hand.
In the wake of the housing crisis, liquidity is extremely important. Liquidity helps sustain a business until inventory is sold. And it helps fund future projects. In the past, a bank might have fronted 100% of the costs for new construction, but now we won’t advance our money until 20% of a project is complete.
As a bank, we want to see a construction firm that can effectively deal with managing costs, has a reasonable timeframe to achieve income generation, and has enough capital to cover expenses, the down payment (of 20%), and potential cost overruns (typically budgeted for 10%).
2) Increasing inventory without justification.
It’s too much risk for too little reward. One item that is very important is managing inventory and projects in process. Many construction companies, both large and small, jump into projects that look strong on paper; however, they turn out to be a major drain on capital. Take the time to research and review each project to make sure you have adequate capital on hand and that the overall work will benefit your bottom line.
3) Choosing multiple banking partners.
If you work with multiple banks on various aspects of your business, there’s a chance that one bank could structure a deal badly and impact the financial dealings of your other banking partners. At First Bank, we believe that being relationship-driven truly sets us apart. To us, our customers are more than just another name on a bulletin board.
4) Not listening to your banker.
Choose a banker that you can trust through the good times and the bad. A good banker might not always tell you want you want to hear. But they can help you learn what you need to know.