6 Ways Contractors Can Increase Working Capital

Ravindra Ambegaonkar
Author : Ravindra Ambegaonkar
June 27, 2022
6 Minutes Read
  
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    Working capital is the difference between current assets (what you own) and current liabilities (what you owe). Metaphorically, it’s the fuel that keeps the engine functioning. Without it, it would be difficult for a business to continue operations.

    Also, it can be positive or negative. However, negative working capital doesn’t necessarily mean a business is going to the wall. Positive working capital, on the other hand, means that the assets of a business outweigh its liabilities. This will help you meet your tax obligations, pay your debts timely, and purchase raw materials.

    In addition, positive working capital also means that your company will be able to weather any financial pitfalls in the construction industry effectively. However, it’s difficult to maintain, considering that some unforeseen costs may arise during the construction process.

    If that’s the case, it’d be best to find a way to boost your working capital to mitigate the unpredictability of the construction sector. So, what are these ways, and how can you apply for one?

    In this article, you’ll discover some of the most effective ways that’ll help you increase your working capital.

    1. Open A Working Capital Line Of Credit

    A working capital line of credit is what most businesses use to invest and grow their working capital rather than purchasing a specific material. Also, it allows businesses to request immediate cash up to a certain amount, helping them fill unpredictable cash flow gaps.

    Here are some situations that may call for a working capital line of credit:

    • Covering miscellaneous construction costs
    • Paying the salary of employees
    • Boosting day-to-day cash flow

    But like all loans, what was borrowed must be returned within a specific period. Otherwise, you’ll lose your chances of applying for a loan again.

    In addition, a working capital line of credit will allow you to pay only what you have used. For example, if you loan an amount of USD$50,000, and only 25% of it has been used, you only have to pay 25% or $12,500.

    Once you’ve completed paying your debts, the line of credit will reset back to its original amount, which you can borrow anytime you want. This is why it’s also called ‘revolving’ lines of credit.

    2. Implement Progress Billing


    Progress billing is an invoice most businesses use to collect payment for a completed portion of a project. It can be prepared and released to clients at different stages of a long-term project.

    In addition, progress billing is generally used for major projects, particularly in the construction industry. This helps contractors improve their working capital and maintain the cash flow they can use to fund their projects continuously.

    Moreover, the invoice you need to prepare may include the original contract amount, the amount your client has paid to date, the total amount to be paid, and the job progress in percentage. With this, you’ll have enough funds to support your projects, and you can be sure that your projects won’t stop midway.

    3. Use Materials Financing


    As the name implies, materials financing is a way to help contractors finance the construction materials necessary to accomplish their projects.

    When you acquire building materials from your supplier, you may use materials financing to pay the upfront costs of your purchase. A third-party material financing company will pay your supplier on your behalf.

    Once the supplier has received the payment, they’ll supply you with the building materials you need as soon as possible. But of course, it comes with a manageable interest rate, which will also make the financing company happy.

    Furthermore, materials financing companies often offer flexible payment terms. Typically, the payment period may last up to 120 days.

    4. Request Upfront Deposits

    Requesting an upfront deposit is a standard practice in the construction industry. It protects contractors from non-paying clients and sustains balanced working capital, keeping the company afloat.

    Essentially, an upfront deposit is a down payment a client pays before the project begins. The earlier the client pays, the sooner you can start the project. Furthermore, requesting upfront deposits may help you improve your asset balance and reduce the debts that may burden you in the first few months of the project.

    5. Request Employee Retention Credits (ERC)


    The Employee Retention Credit was developed in 2021 to help companies by providing them with cash assistance to sustain the payroll for their employees. With ERC, you’ll be able to improve your working capital while keeping all your employees. You may apply for as much as USD$7,000 per employee per qualified quarter.

    So, who is eligible to receive ERC assistance? To be considered eligible for credit, a company should fulfill either of the following criteria:

    • Businesses that are partially or have fully suspended operations due to mandatory government restrictions
    • Businesses that have experienced a significant loss of revenue

    Once qualified, you’ll receive cash assistance based on the number of your employees and your nominal portion.

     6. Use A Purchase Card

    A purchase card, or ‘P’ card, is a commercial card usually available through banks. It allows companies to take advantage of their existing credit cards to make payments to sustain their business expenses.

    With a P card, you’ll be able to pay your suppliers on credit. Then, all you need to do is build enough cash funds to pay your credits and replenish your card’s balance.

    In simplest terms, a P card is like a normal consumer credit card. However, you have to pay the amount borrowed in full every month. It doesn’t have a 12-month and 24-month installment feature like regular credit cards, but it may be negotiated with your bank.

    Furthermore, some P cards may offer cashback rewards and other incentive programs that could add an extra boost to your working capital. You may talk to your local banking institution to learn more about this.

     

    Final Words

    Working capital is the driving force that helps keep your business going. Without it, you won’t be able to pay your debts on time, provide salary to your employees, and sustain unpredictable construction costs and delays.

    That being said, you may consider the following methods discussed above to improve your working capital. But don’t forget to pay your debts on time to ensure that you can borrow or loan again in the future.

    Tags construction contract | Business Finances

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