How can contractors finance building materials without paying cash up front?

Contractors often buy materials in bulk at the beginning of the project, before they have been paid for the work. However, at the beginning of a project, they may not have the cash flow to pay the cost of the order upfront. In this situation, contractors often rely on material financing for a project.

Construction materials have to be purchased long before they’re used on site. Some supplies can take up to 12 weeks to arrive.

Some suppliers bill as soon as materials arrive at the jobsite, while others bill when an order is placed. Payment terms depend on the contractor’s credit record and the supplier’s policy.

With all these expenses at the beginning of a project, it’s good news that contractors can bill customers or GCs as soon as they place an order. Except they often can’t. Contracts often prohibit billing for materials until they reach the jobsite. But contractors must pay suppliers long before they recoup their own costs. And those payments to suppliers can happen months before contractors get paid by customers. Customers can take 83 days or more to pay their bills.

The lag between the time materials are purchased and when they can be billed for turns the financing of supplies into a problem. During this waiting period, contractors are hard-pressed to fund their purchases. Many don’t have the cash or credit for bigger jobs, and the lag keeps them from growing their business. Material loans protect contractors’ cash.

Four Common Ways Contractors Pay for Materials

You don’t have to pay for materials out of your own pocket, though. Here are four common ways contractors pay for materials: credit with their supplier, bank loans, supplier financing and credit cards.

Whenever you want to place an order with one of your suppliers, but you don’t want to pay for it immediately, you can negotiate trade credit with them. Trade credit happens when the vendor lets you pay for the materials a few days later. The supplier still delivers the materials right away. To open the account, the supplier needs to review your financial history. If you can’t pay for the materials by the payment date, then the supplier may charge you interest and late fees.

Most contractors can get trade credit, but new firms and contractors with poor payment histories can be turned down. Suppliers aren’t crazy about waiting to get paid, but they do it to boost sales.

You can also take out a loan from a bank or another lender to pay for your materials upfront. Banks usually insist on audited financial statements demonstrating your company is on solid ground. The bank will check your credit record and set an interest rate based on its assessment of risk.

Usually, banks stay away from financing materials. Non-payment from a customer or GC is a risk that scares lenders, and that makes obtaining a material loan difficult. A bank loan can also take a long time to secure, so apply as early as possible. SBA-backed loans are the fallback. But SBA loan-seekers may have to exhaust every other possibility first.

Vendors who sell building materials don’t want payment delayed any more than contractors do. With supplier financing, as you make purchases from suppliers, the financing company pays your vendor right away. You pay the financial company back later, usually in 30 to 60 days, though some repayment periods stretch to 120 days. The financial company generally charges a percentage of the total purchase price.

Supplier financing suits many contractors, because terms are generally longer and interest rates are reasonable. It keeps projects on schedule by letting a contractor get an order underway before the project starts. To be eligible, you may have to pass a credit review, and your fees can reflect how risky the lender thinks you are.

Plenty of contractors pay for materials with a credit card. Credit cards provide the resources to buy materials without a lot of hassle or paperwork. Many suppliers take credit cards. You can use a commercial credit card to purchase goods from a supplier, and then pay the card issuer back later. If you don’t pay your bill on time, you face late fees as well as interest.

Heavy credit card use, such as for a large job, can exhaust the credit limit. And if you’ve got multiple projects going, your spending on this job will affect the funds available for all your other projects. Make sure you have the buying power for all of your purchases. As with most credit, the size of your credit limit depends on your credit record.

Using any of these materials financing options is a lot better than straining to come up with the cash yourself. Materials add up quickly on construction projects, so figure out how to finance them early. Unless you’ve got a huge cash reserve for materials, consider looking into at least one of these options. With help from material financing, your small business can take on bigger projects, expand and grow.