Smooth Sailing: An Overview of Factoring

    An ironic part of this blog is that I spend very little time covering what our company does.

An ironic part of this blog is that I spend very little time covering what our company does.

I share things I read about in The Wall Street Journal.  I ramble on mindlessly about the history of construction equipment.  I talk about my job, and my dog, and the things sitting on my desk.  But, I spend very little time talking about what we actually do, or why factoring can be a good choice for those in commercial construction.

And so, in short for those of you who are unfamiliar with factoring, what we do is lend against money that you’ve already earned, but that you won’t be receiving for another 30, 60, or 90 days.

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In commercial construction, this is a common scenario:  You submit your invoice or pay app to the general contractor.  The general contractor approves it a few days later.  Then, they submit all of the pay apps for that month to the owner, who then submits everything to the bank, and then…I don’t know.  As far as I can tell, nobody knows.  Those pay apps all just sort of sit somewhere, waiting for somebody to eventually release payment to somebody else.

Depending on the payment terms of your contract, things may hang out in limbo for as little as a week or two, or for as long as three months, and during that time, there isn’t much that you can do about it.

This is where factoring comes in:  As long as your general contractor can sign off saying that the pay app is correct, and that they’re eventually going to pay you for the work, we can go ahead and advance you a percentage of the invoice amount. Then, when the time comes, your general contractor will simply release the check to us instead of you.

By doing this, you have the money that you need to handle payroll, cover overhead, and negotiate supplier discounts.

Those benefits are obvious, and they make up the core purpose of factoring.

What we aim to do, though, is to provide as much additional value and security as possible–after all, we succeed when you succeed.

This is why for no additional charge, we’re more than happy underwrite account debtors before you sign on the dotted line to begin a million dollar job–we want to make sure you’re working for people who will actually pay you, whether we’re factoring on the project or not.  We also have an office full of accountants who will happily help you with your bookkeeping and pay apps, and who can advise you on which jobs seem to be most profitable. We can help manage lien waiver and supplier payments, making sure that jobs aren’t held up by frozen accounts or supplier liens.  And, when worse comes to worse, we also have yours truly.

A lawyer.

Right here.

In the office.

That you can call anytime.

Santa’s List Day

  According to the great trove of knowledge that is Google, today is Santa’s List Day! That means it’s…time to

According to the great trove of knowledge that is Google, today is Santa’s List Day!

That means it’s…time to make your list for Santa? Santa’s day to check and see if you’ve been naughty or nice?  Something completely unrelated to Christmas, like the day that Santa makes his grocery list for Mrs. Clause?

I don’t know, really.

But either way, that’s what today is!

Personally, I’m going to go with the first option.

After all, I love asking for stuff.  It’s so much easier than the boring alternative of (1) seeing something that I want (2) checking my bank statement, and (3) realizing that whatever it is ain’t gonna’ happen.

Unlike my AmEx, Santa can make things happen. I know he can. I’ve seen the Mercedes commercials.

In all seriousness, let us know if there’s anything we can do to help make your Christmas dreams come true.  More importantly, though, go give your family and friends a hug.  Put a dollar in the Salvation Army kettle.  Sit down with a glass of egg nog and admire the tree you spent all day decorating.  Go make the most of this Christmas season. That’s what the holidays are really about…not shiny cars with giant red bows.

However, if you want to ask Santa for a Porsche and Patek Phillipe, I won’t judge.  After all, today is the day for those requests.

Happy Thanksgiving

Here at Construction Finance, we have a lot to be thankful for. Our wonderful families. Our lovely work family. Our

Here at Construction Finance, we have a lot to be thankful for.

Our wonderful families.

Our lovely work family.

Our hardworking clients who make everything possible.

So to all of you, thank you!  Thank you for your business.  Thank you for going out there every day and building the things that need to be built. And to paraphrase Mr. Rogers, thank you for being you.  Because the men and women we work with every day are part of what make this job so great.

Maximizing Your Productivity

I’m going to be honest:  Some days, I’m not really sure what to blog about. I mean, I’m a lawyer

I’m going to be honest:  Some days, I’m not really sure what to blog about.

I mean, I’m a lawyer by trade.  Figuring out how to create a blog about construction that people actually want to read…well, that’s a bit outside my area of expertise.

There is one thing I know, though, and that’s that I care.

I care about everybody having the money they need to support their families.  I care about making sure people know about lien rights, and what contract clauses to watch out for.  I care about making sure job sites are safe. I care about owners and comptrollers being aware of their financing options.  I care about doing all I can to encourage good practices, both in life and in business.

And, in that spirit, I like to share anything I can that seems like it could be helpful, even if it does fall a bit outside of my usual purview.

It’s Not Time You Need To Manage, It’s Your Energy

This article is courtesy of Jobsite, and while a few parts may be unrealistic, it’s well worth the read.

The part about ‘Harnessing Meaning and Purpose’?

Meh, good advice, but not 100% applicable to all of us. (Personally, I would have loved to have been an engineer.  That 23 on the math section of the ACT told me it might be wise to consider other avenues. Being a supermodel also sounded pretty great. That idea…was even less realistic.)

On the other hand, eating right and getting enough sleep?  That’s a good one to put in place.  Focusing on one task at a time? Also a very sensible goal.

The truth is, there are some things we can’t control.  Often, the hours of the working day are dictated by people far higher up the chain than we are.  The nature of our jobs? That tends to be a balancing act between personal desires and the hard realities of life.  Even on the ones where the ball is theoretically in our court, sometimes things happen (I’m looking at you, random mosquito that kept me up half the night, even though this is obviously the wrong season for mosquitos.)

However, other things are well within our domain.  So please, eat a salad.  Get some rest.  Think about how the tasks of the day be can scheduled so as to maximize productivity.  Try to forget about that fight with your spouse last Friday. All of those things are killing your energy, and making life even more exhausting than it needs to be.

Snow Day

As those of you who paid attention in geography may have already noticed, some places are known for snow:  Michigan. 

As those of you who paid attention in geography may have already noticed, some places are known for snow:  Michigan.  Wisconsin.  Minnesota.  The North Pole.

Other places…aren’t.

Arkansas would be one of those places that isn’t.

Well yesterday, it snowed.

Roughly three snowflakes in, we were done working.  Or at least I was.  After all, IT WAS SNOWING!!!!

Better yet, it just kept snowing!

We got to live in our very own snow globe…albeit probably one from the clearance section, since ‘office building snow globes’ haven’t really become a The Must-Have Thing yet.

Still, it was pretty much amazing.

Of course, now the snow is already melting, and we’re back to being productive people, but for one lovely day, we had snow.  And our mittened fingers are crossed for more.

*Obligatory sidenote:  Yes, we do have more than two people in our office.  Oddly enough, though, some people would rather sit at their desks and do their jobs than pose for pictures.  I…don’t what’s wrong with them, really. But it’s okay, because their productivity gives me more time to buy snowflake sweaters and try to catch snowflakes with my tongue!

Opioids: The Tiny Elephant

Construction is a great industry. Unfortunately, like every industry, it has the occasional elephant in the room that we don’t

Construction is a great industry.

Unfortunately, like every industry, it has the occasional elephant in the room that we don’t really like to talk about.

Right now, in construction, much like in the rest of America, one of our biggest elephants is (ironically) small, and known for pairing well with a morning glass of grapefruit juice.

…

Specifically, as an industry, we’re facing an opioid epidemic.

Thanks to a combination of demographic factors and practical realities, construction has one of the highest rates of opioid dependence in the country. (Awareness The First Step for Construction Industry ) For decades, a steady flow of prescription painkillers made their way from doctor’s offices to jobsites, allowing workers to keep welding beams and hanging sheetrock as their muscles and joints protested.  The pills were cheap. They were readily available. And they made it possible to get back to work faster; to put in longer hours than what fallible bodies would allow.

And, years later, we’re dealing with the fallout of that.

Unfortunately, this is also a problem for which there is no easy solution: Official reports put the rate of opioid dependence among construction workers at 1.3%, second only to the recreation/entertainment/food business.  In reality?  The numbers are probably higher. On most jobsites, it’s a given that at least one or two workers are under the influence.

However, the first step to tackling the problem is admitting that there is a problem.

If we want to cut down on absenteeism and worker’s comp claims; if we want to quit losing employees to addiction, we have to admit that the problem exists.

And then, company by company, we have to figure out the best way to address it.

If you’re a construction company owner, go out to the jobsites.  Get to know the people working for you. Create an environment where people can feel comfortable talking about the issues they’re facing.  Be on the lookout for signs of trouble. Talk to your foremen about the signs. Have a plan of action in place.

The specifics are up to you: What works for one company won’t work for another.  But whatever you do, please do something. It’s not just good for the bottom line.  It’s also the right thing to do.

Make America A Country You’re Proud Of

Growing up, my parents always taught me that it’s impolite to talk about money, religion, or politics in mixed company.

Growing up, my parents always taught me that it’s impolite to talk about money, religion, or politics in mixed company.

Well, I work in finance, so the first item on that list went out the window a long time ago.

As for the other two, well, I think the key is being respectful.

I’m not here to tell you who to vote for.  I’ll leave that task to your annoying Facebook friend who’s posted 300 political memes in the last two days.

What I will tell you to do is go out and vote.

………………….

One of the greatest things about this nation is that we all have a say.  Our individual voices may not be loud, but they count.  And one by one, they add up.

So please. Whatever you do today, and whoever you support, go out and make your voice heard. It’s people like you who make America great, and nation needs your voice.

Happy Halloween

  Well, it is officially that time:  If you haven’t already, today’s the day to make a run to the

Well, it is officially that time:  If you haven’t already, today’s the day to make a run to the store and buy enough candy to make any dentist cringe.

Then, depending on what your willpower is like, feel free to turn off the porch light and keep all of those Hershey’s bars for yourself.

On behalf of all of us at Construction Finance, we hope you have a safe and happy Halloween.

Alternative Lending in the Construction Industry

Generally, when people think of construction lending, they think of the obvious: Banks. After all, in pretty much every sector

Generally, when people think of construction lending, they think of the obvious: Banks.

After all, in pretty much every sector of the economy, banks provide the flagship product:  The traditional line of credit.

There’s no denying that the bank LOC has some definite advantages–namely, price.

While alternative lending varies with regards to fees and interest rates, virtually every product on the market is going to be more expensive than a conventional credit line from the local bank.

However, for contractors, these low rates are both a blessing and a curse: On one hand, a bank loan is cheap.  On the other hand, bank loans are cheap for a reason…with their strict underwriting requirements, banks generally can only lend on the very cleanest, most secure deals.  For someone who’s been in business 20 years, has significant assets, great credit, and a variety of solid account debtors, that may not be a problem, but for everyone else, it can present a real hurdle.

On top of that, in order to guarantee their security, banks often over-collateralize–it’s not uncommon for a $400k line of credit to be secured by $700k in assets, plus $400k in receivables.  This requires not only significant assets, but creates the risk to a business owner of significant loss in the event of default.

It’s due to these drawbacks that some businesses turn to alternative lending sources.

While alternative lenders are more expensive, they’re able to offer flexibility that banks cannot. Additionally, depending on the type of product, some alternative lenders offer a level of value that is comparable to a bank line of credit. Below is a brief overview of the types of alternative lenders that exist in the construction sector, as well their benefits and drawbacks:

• Mobilization Funding

Starting a project takes money.  Just getting to that first draw on a job can mean several weeks, if not months of payroll, as well as liability insurance, materials, and the costs of getting everything to the jobsite.  Companies that specialize in mobilization funding aim to solve this problem by advancing contractors the money they need upfront to begin the job.

Benefits–Gets the client the money they need to start the job.  Generally cheaper than a Merchant Cash Advance (MCA).

Drawbacks–High interest rates.

• Factoring

Particularly in commercial construction, getting to the first draw on a job is only half the battle–once an invoice has been submitted, the property owner has to wait for the bank to release payment in order to pay the general contractor, and the general contractor then has to wait until they’ve received the money in order to pay their subcontractors.  For a subcontractor, this means payment can often take up to 90 days after the submission of that initial invoice….which, in turn, means another 90 days of floating the cost of payroll, materials, insurance, and overhead. Factoring works by advancing the contractor a percentage of their open pay app, giving them money which can then be used to keep things running while they wait to be paid by the owner.

Benefits–Aside from government backed SBA loans, this is generally one of the cheapest forms of alternative lending. Also, because so much of a factor’s security comes from the strength of the account debtors, a good factor will steer the client away from jobs that are unlikely to pay.

Drawbacks–Paperwork and red tape.  Though getting funding through a factor is still faster than obtaining a bank LOC, there does tend to be a bit of underwriting and paperwork involved.

• SBA Loan

Recognizing that a conventional credit line may be unobtainable for many small businesses, even those with reasonable credit and assets, the government has stepped in and offered to back specialized loans intended to help small companies grow.  SBA loans can go up to $5M, and offer rates comparable to that of a normal line of credit.

Benefits–Cost

Drawbacks–Extensive underwriting.  Lots of paperwork.  Limited flexibility.  Much like the traditional line of credit, these loans can be quite difficult to attain, particularly for borrowers with past credit issues.

• Merchant Cash Advance

A Merchant Cash Advance is generally the last resort for those in search of business financing.  On one hand, these advances are easy to obtain, and the underwriting process is near-instantaneous, allowing applicants to get the money the same day they apply. On the other hand, the fees are exorbitant, often exceeding 200% APR.  As such, these are essentially the PayDay Loans of commercial finance, complete with all of the problems normally associated with that industry.

Benefits–Simplicity

Drawbacks–Extremely high fees

While none of these alternative sources of lending will ever replace the conventional line of credit, they do provide useful avenues for those times when a traditional credit line just isn’t a good fit. In addition, particularly with services such as factoring, it doesn’t have to be an either/or arrangement:  A client may benefit from working with both a factor and a traditional bank, in order to get the flexibility needed without paying higher fees than necessary. Such arrangements can be beneficial for all, since such a partnership may also provide greater financial protection for both the bank and factor.

Today’s Useless Fact: The First Skyscraper

When you enjoy useless information as much as I do (See: History of Indoor Plumbing), you realize that telling people

When you enjoy useless information as much as I do (See: History of Indoor Plumbing), you realize that telling people about one pointless thing just isn’t enough.

After all, the world is filled with cool knowledge!  Why keep it all to yourself?

For today’s topic that probably won’t actually help anyone get ahead in life (but that’s fun to know about regardless), I’d like to talk about skyscrapers.

Now first of all, full disclosure:  I love skyscrapers! I’m trapped in the delta flatlands here. If it weren’t for tall buildings, I’d never get to see the world from a vantage point that’s higher than five feet off the ground. Realistically, planes and high-rises are pretty much my only opportunity do anything other than stand eye-level with rice fields.

However, as some of you are probably too aware, skyscrapers are pretty complicated to build.

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Creating a regular building is a complicated feat that involves teams of architects, engineers, and multiple construction crews, as well as months (if not years) of time and millions of dollars.  A skyscraper involves all of those things, times a zillion.

As such, there’s a reason that these massive structures are a pretty new innovation–if you would have told your great great great grandparents that people would live in 20 story buildings, they would have thought you were insane!

………

It turns out, the world’s first skyscraper was erected in 1884.

Built in Chicago’s business district, the Home Insurance Building stood ten stories tall, towering over the midwestern skyline.  Next to the two and three story wood-frame buildings nearby, the Home Insurance Building had to have looked like something from a science fiction movie…had movies existed at the time.

To support the structure, architects had to design a steel frame to support the incredible weight of the building.  We take this for granted today, but at the time, nobody had ever imagined using anything but wood to frame a structure.  Implementing this new frame had to have been an incredible feat for both the engineers and the construction crews on that ground; the weight and magnitude surpassing anything they’d ever worked with before.

Now, by today’s standards, this was ultimately an unimpressive building.  My old college dorm was seven stories…and that was in the middle of the southern delta, surrounded by cotton fields just a couple of miles away. Ten story brick buildings are a dime a dozen, housing everything from college kids playing beer pong to call centers and doctors offices.  In 1884, however, this was the tallest building in the world; a proud testament to the wonders of American innovation and midwestern work ethic.

……….

Unfortunately for historic preservation nerds like myself, the innovation of this building was indeed soon forgotten.  Within a few years, bigger, better buildings popped up all over the country, towering even closer to the heavens.  Less than 50 years later, in 1931, the building was demolished by people who no longer saw much grandeur in a building that only stood 10 stories tall.

The work by architects like William LeBaron Jenney (the architect behind this structure), however, still lives on.  Those same engineering and construction methods that made the Home Insurance Building possible would later pave the way for the way for all of the gleaming, thirty floor glass towers we take for granted today.