Every owner wants expansion and growth, but with economists forecasting that there could be a construction recession on the 6-18 month horizon, it’s best to be on our toes. Many builders were caught off guard when the Great Recession struck almost 15 years ago. Here, experts share lessons learned and offer insights for steering forward.
In the spirit of first things first, make sure you are carefully monitoring your account receivables: the older they become, the harder it tends to be to collect on them. You don’t want to find yourself doing work for clients who have not paid up—especially if a recession blows in. Construction Pros remind us: “Contractors should refuse to do work for parties that do not pay them on time or according to the contract. Of course, it can be more difficult to cut off an account when work is more scarce. Still, it is never a good idea to incur more costs for a party that is struggling to pay you. Often, this leads to an even bigger loss.”
Rethink Your Debt Strategy
Although accountants may recommend utilizing lines of credit from the bank near the end of the year, this practice can take a real toll on bonding capacity: debt limits ability to secure bigger projects on the go forward. Philip Shepard, Head Underwriter at Colonial Surety, points out that working capital is key for contractors seeking underwriting for new commitments, and offers this perspective:
When contractors utilize a chunk of their banking lines of credit at year end, and carry unpaid bills into the next calendar year, their financial balance sheets look like they have more debt than they really do. While this tactic may dilute net earnings and result in paying less taxes, it also reduces working capital, weakening capacity to secure larger bonding lines—and win larger projects. For contractors striving toward growth, the better tactic might be to reduce the debt: this will improve working capital and enable underwriting of larger bonds. Bottom line, contractors need to ask themselves this strategic question: Do I want a larger bonding line of credit so I can grow my business as I reach for bigger projects, or, do I want to pay less taxes?
Keep in mind that even if there is a recession, it is possible for contractors to bob and weave their way to growth. Many surviving and thriving stories have their origins in navigating the Great Recession. Don’t forget, Colonial Surety is here to help: Claim your next victory when you get a surety line of credit—in writing—and a whole lot of other advantages with The Partnership Account for Contractors®. After qualifying for this free service, you’ll be more ready to win new contracts then ever. The Partnership Account gives you a private digital dashboard, providing a day to day snapshot of your single and aggregate limits, as well as your current and available bond capacity. Go ahead: update your work on hand, increasing your aggregate so you can move that next project forward. Bid bonds, performance bonds, payment bonds: in a snap! Got a special opportunity coming along? Let’s talk!
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Watch Out For Clauses
Of course having a revolving line of credit with lenders remains vital, especially if there is a cash shortfall while waiting for payment. However, be careful about line of credit agreements that contain “demand clauses.” As Construction Pros caution:
A demand clause means the lender can call the line of credit at any time and the contractor will need to pay this back. Most contractors feel that their lender would never do this, but The Great Recession showed the opposite. Many lenders got into trouble of their own, were purchased, or taken over by the FDIC. When this happened, lenders called lines of credit from contractors that needed the borrowing the most. Contractors may want to consider converting some revolving debt into a term loan that cannot be called as easily.
Additionally, it’s critical for contractors to carefully review contingent payment clauses. Waiting on payment has put many a contractor out of business. Keep in mind : “The validity of pay-if-paid, and pay-when-pay varies by states. Pay-when-paid assumes that a contractor will be paid at some point. However, waiting on payment can certainly cause cash flow problems….Pay-if-paid pushes all the financial risk to the contractor. When the Great Recession hit, many contractors were under Pay-If-Paid contracts.”
There’s always something to figure out when running a construction business, isn’t there? You don’t have to go it alone. These days, every financial insight gleaned helps you boost your business forward. With The Partnership Account for Contractors® from Colonial Surety you’ll have lots of useful intel at your fingertips—and our expertise on your side— as you plot your business growth, strategically, one step at a time.
Founded in 1930, Colonial Surety Company is a leading direct seller and writer of surety bonds and insurance products across the USA. Colonial is rated “A Excellent” by A.M. Best Company and U.S. Treasury listed.