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Construction Industry Debt Relief to Handle Slowed Cash Flow

The construction industry has been hit hard by the recent economic downturn. Many contractors are struggling with slowed cash flow as projects get delayed or cancelled altogether. This article looks at some of the debt relief options available to help construction companies weather the storm.

Understanding the Problem

The problem largely stems from the unique payment structure in the construction industry. Contractors often have to front significant costs for materials, equipment rentals, subcontractors etc before they receive payment from the project owner. They rely on a steady stream of new projects and progress payments to keep cash flowing.

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But when the economy takes a turn for the worse, owners may delay or even cancel projects altogether. And progress payments can slow to a trickle. This leaves contractors strapped for cash, unable to pay suppliers and subcontractors, let alone cover payroll and operating costs.

“We suddenly went from billing $500K a month to less than $50K. Overnight our cash flow dried up and we struggled to make payroll and payments to subs and suppliers. It was incredibly stressful trying to keep the business afloat.” – John Smith, XYZ Construction

The problem has been exasperated by supply chain disruptions and inflation driving up material and equipment costs. Thin margins have left little room to absorb these increased input costs.

Debt Relief Options

Thankfully there are a number of debt relief options tailored to the construction industry’s unique needs:

1. Mechanic’s Liens

Mechanic’s liens allow contractors to place a legal claim on the property they improved through their work. This gives them leverage to get paid what they are owed, even if the owner sells the property. Liens are a powerful tool but require strict adherence to notice and filing deadlines. This construction lien guide outlines the process.

2. Bond Claims

Many public projects and some private ones require the owner to take out a payment bond. This bond acts as a guarantee that the contractor will get paid. Contractors who don’t receive payment can make a claim against the bond to recover what they are owed. This guide on payment bonds covers the claim process.

3. Collections

If an owner simply refuses to pay, contractors may need to pursue legal action. Retaining an attorney that specializes in construction collections can be helpful to push for payment through liens, lawsuits, and other methods. This article covers key factors in choosing a construction collections lawyer.

4. Factoring

Factoring essentially sells a contractor’s accounts receivables to a third party at a discount. This immediately frees up cash that would otherwise be tied up in unpaid invoices. It avoids taking on debt. However, it means giving up a portion of what is owed. This factoring explainer covers pros and cons.

5. Working Capital Loans

Loans allow contractors to borrow against unpaid invoices, equipment, or other business assets. This also provides immediate cash flow relief. Payments are structured around when invoices get paid. So it’s critical to partner with a lender that understands the industry’s unique cash cycle. This guide covers working capital loans tailored to construction.

6. SBA Disaster Loans

The pandemic triggered special SBA disaster loan programs offering low interest loans to impacted businesses. Some construction companies may still qualify for these programs or other SBA loan products suited to the industry. This SBA page outlines options.

7. Business Debt Consolidation

Consolidating higher interest debts into a single, lower rate loan can reduce monthly payments. This frees up cash flow to cover operating expenses. This guide from Nav covers the process of consolidating business debt.

8. Supplier & Subcontractor Negotiation

Renegotiating payment terms or discounts with suppliers and subs can provide some breathing room. Offering incentives for early payment can also help align cash inflows with outlay obligations. This article explores strategies for negotiating win-wins.

The key is exploring all options and developing a cash flow management plan tailored to the unique situation. Don’t hesitate to bring in financial advisors who understand the construction industry.

 

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