Working Capital Woes

The Interface Financial Group Advisory Board annual meeting took place recently in Irvine, California. Representatives from offices in both Canada and the U.S. discussed the current economy and availability of funds for small business working capital. As the economy has continued to slow, lenders are getting more and more conservative. One of the industries hardest hit is construction - construction is always perceived as riskier to the banks and other lenders.

Cautionary Signs in Construction Industry

This view of construction is based on an analysis of past experience. An article from The Journal of Lending & Credit Management, Red Warning Flags of Contractor Failure,( July 1998) lists 6 major reasons for failure:

Poor estimating and job cost reporting

Poor project management

No comprehensive business plan

Poor communication with customers

Poor financial management

Factors beyond a contractors control

Poor Financial Management

The article goes on to describe red flags that lenders look at in each of the above areas. Since Interface works in this financial area with contractors, I would like to highlight poor financial management. The red flags mentioned in the article include:

More overdrafts and past due payments

Worsening trade credit record

Worsening individual credit reports on principals

Decline in quality and frequency of financial statements

Sudden change in CPA firm, especially to CPA inexperienced in construction accounting

New borrowings from new lenders

Lack of Accounting Resources

Many small businesses have technical resources within their companies to support estimating and supervising trade skills. When it comes to financial management and accounting, few businesses routinely consult an accountant or financial advisor. If the owner does not possess this expertise, the business is missing a key component of operation. The last three warning signs itemized above emphasize the importance of obtaining quality financial advice for the business. If the company uses internal computerized accounting software, is someone available to analyze the financial data to provide management with indicators on how the business is doing? What is the difference between a profit and loss statement and a cash flow projection? Lenders and other funding sources will expect a professional level of financial information from the business. Without this information, the business will not be taken seriously by the financial community.

Slow Cash Flow

The first three warning signs mentioned above confirm the contractor’s cash flow problems and require appropriate action or the business will gradually worsen and slide towards failure. Deterioration in trade payment records frequently leads to the contractor being placed on a COD status or the filing of material lien actions, making operation of the business even more problematic. Tight cash flow may make it difficult for the contractor to continuing bonding authority. Sudden loans to or withdrawal by key management indicate that the cash flow illness has infected its principals.

The best solution to slow cash flow is to remedy the situation before it becomes such a serious issue. This requires prompt action when the problem occurs.

A Cash Flow Solution

The Interface Financial invoice-discounting program turns cash slow into cash flow. For over 30 years, Interface has been financing small business needs with a ‘use it when you need it service.’ The Interface program turns completed work into cash-on-delivery by purchasing the company’s billings. This is also called accounts receivable financing. Interface offers the following benefits to the contractor:

One-time transaction with no long term contracts or commitments.

No set up fees or hidden processing fees.

No withdrawal or back-end fees.

No minimum or maximum transaction amount.

Funding within 3-5 working days.

Purchases of monthly billings at 90% of face value, less retention

Prequalification by phone on same day you call

Local decision-making-you talk to the person responsible for approving the funding

Paperwork can be completed in a couple of hours.

Business credit problems not an obstacle.