Critical Issues
To compound a challenging construction market, today's financing environment has become one even the most credit-worthy contractors may have never experienced. The scarcity of capital has made financing far more expensive and difficult to obtain. Simply put, there is significant volatility in the financial markets and the guidelines for extending credit is evolving.
Current Trends
Contractors should expect increased scrutiny in the credit process, even with lenders where you have long-term relationships.
Additional Insights
Lenders understand that limited availability of credit is just one of the factors simultaneously squeezing your business. I have some suggestions on how to manage your balance sheet, improve cash flow and increase liquidity and operating efficiency. These recommendations can help you weather the storm and position your business for expansion when the turnaround occurs, but they require a high level of discipline, a careful examination of every aspect of your business, and the willingness to adapt as the market changes.
- Create an immediate strategy to get you through 2009. It should account for fluctuating fuel and raw material costs, margin compression and fewer bid opportunities. Be more selective and perform extensive due diligence on projects you engage in.
- Know every detail of your current job costs, including what's in the pipeline and what's being bid on. Be sure to factor in higher financing rates.
- Map out your cash-flow streams and when payout requirements will occur, being sure to consider both early buyout and end-of-lease options. Some lenders automatically notify you of these options, while you may have to request it of others.
- Look for ways to raise cash currently locked up on your balance sheet. Excessive liquidity in the marketplace and favorable financing rates during the "boom" years of 2004-2007 drove an unprecedented buildup of construction assets. As the market has declined, much of this equipment is no longer working a full shift or is sitting idle. Consider leveraging the equity in those assets through a sale-leaseback to generate additional working capital and improve balance sheet ratios. You may also be able to establish a revolving line of credit backed by your equipment.
- One decision many contractors made during the boom times was to finance equipment for very short terms, typically 24-36 months, fully amortized. We also see contractors paying on as many as thirty different notes every month, which is time-consuming, costly and inefficient. Consolidate that short-term debt into fewer, longer terms. A reliable financial lender may be able to consolidate all your equipment into one note and stretch the amortization.
- Be very selective about whom you seek capital from. Look for a solid, established source with a strong balance sheet, one who has been committed to the market long term.
- Consider leasing as an alternative to outright purchases or bank loans, for which a sizeable down payment may be required. Leases do not typically require a down payment.
- Look for opportunities to streamline your business processes to lower costs and increase productivity. Much of the time spent completing process steps-whether on the job site or in the office-is waste. Removing steps that don't add value to customers and drive profitable growth for your enterprise could substantially improve your bottom line.
- Have an ongoing dialogue with your finance partners, accountants and key advisors to get a better perspective on cost control/management opportunities. Determine the potential availability of financing in advance of liquidity needs.
- Plan a conservative course for the near term. Today's reality is that the softness in the market may continue for an extended period of time.
Tags: 2009 January Issue , Executive Insights , Professional Services Executive Insights , State of the industry
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