One of the biggest decisions that a small construction business owner makes is when to consider a business loan or a line of credit. Sometimes the decision will be made from necessity and sometimes from the desire to finance a growth strategy, bankroll a special project, or make an equipment purchase. In each case, it is an important decision in the life cycle of a small business, and it needs an appropriate level of research, understanding, and assistance to make the best decision for the long-term success of the company.
As the former Chief Financial Officer of a rapidly growing civil construction company, I had to successfully navigate the task of obtaining both an SBA 7(a) Standard small business loan and a business line of credit to help fund a growth strategy. The process can seem daunting, but it was ultimately a very beneficial way to finance growth and it allowed the company to move into new scopes of work that would not have been possible without outside sources of funding.
Small Business Loans: They’re going to give us the money..aren’t they?
My company had been operating on cash flow for several years when the executive team decided it was time to apply for our first small business loan to help grow the company in new directions and to establish some much-needed credit. We called our long-time banker and asked to speak to someone in the small business loan department without even knowing if that department existed. It turns out that our bank, like many other banks with a business banking division, had an onsite representative who works with businesses to obtain loans through the Small Business Administration if they participate in the Preferred Lender Partner program, or PLP. In that case, the bank will have qualified lending status and will be able to process the loan paperwork, complete the financial due diligence on the company, and in most cases have credit decision authority over the loan without the approval of the SBA. The lending institution will make the loan, but the SBA will assume a considerate amount of risk if the loan goes into default. In our case, the SBA would have assumed 75% of the defaulted amount leaving the PLP with a smaller financial responsibility.
With all these safety nets for the bank provided by the SBA, we assumed that our loan approval was guaranteed, and we waited anxiously for the approval letter. Within days, our loan was rejected due to insufficient working capital and retained earnings that were not large enough to justify a loan in the requested amount. Essentially, we were turned down for the money because we needed it and our financial statements reflected that. More than a few of my professional contacts said to only ask a bank for a loan when you do not need it. I thought they were being cynical; turns out they were correct.
We went back to the drawing board and put a plan in place, in conjunction with the bank, to get our company in a better financial situation and to postpone a growth strategy in favor of operating a bit longer in our existing scopes of work. We were unprepared to get a small business loan then, but we immediately started making better financial decisions for the future of the company and re-focusing on the bottom line. We knew that we had to give the bank every opportunity to say yes to the loan. We got our first of many SBA 7(a) loans almost exactly one year later and used the money to finance the growth strategy that we spent a year refining.
Line Of Credit: Use, Pay Back, Repeat.
Another tool in the small business arsenal of bank financing is the revolving line of credit. A revolving line is typically a predetermined amount agreed to by a lending institution that can be drawn by the company utilizing a formal request system followed by a transfer payment of funds into the company’s operating account within days, sometimes sooner. Any amount drawn on the line is then paid back in due time by the borrower, thereby restoring the line amount without any need to reapply in the future. A line of credit may be a requirement of an investor, a potential business partner, or an insurance provider as an indication of the financial health of the company. It will also help all interested parties sleep a little better at night knowing there is a financial reserve waiting to be tapped if necessary. In my case, the company had a small line of credit but was obligated to seek out and find a larger line to maintain a surety bond that was obtained as an asset in the acquisition of a competitor. The bonding agent wanted as much security as possible so that the newly formed venture would have access to funding and be able to operate at full speed ahead. Similar to researching small business loans, I went back to my trusted network of bankers with whom I had worked for many years and we started the due diligence process all over again.
This time, a smaller bank rose to the occasion and offered a revolving line that was both commensurate with the insurance company’s comfort level and one that made the bank’s due diligence time commitment worth the effort. We did our research and asked as many questions as possible. Our financial house was in order after many years of planning our growth strategy and like before, the plan was to give the bank every chance to approve our line of credit in the largest amount possible with the lowest interest rate. Sometimes, a regional or local bank is hungry for business or is willing to work with a smaller business today with the hopes that it turns into a larger business tomorrow. It is important to remember that some banks need your business as much as you need their money, and the quid pro quo of small business financing should not be ignored.
We used our line of credit for several years when the need arose; for example, to meet increased payrolls when overtime was necessary to complete a job or when clients took 30 extra days to pay on terms that were already pushing up to the net-90 mark. Our line of credit not only maintained our surety bond and helped ease our post-acquisition environment as prescribed, but that proverbial easy sleep manifested, knowing that the money was there when we needed it.
Construction companies face distinct challenges in today’s market. There are field labor shortages, supply chain issues, and market uncertainties that keep construction business owners on their toes all the time. But all companies face the reality of needing to finance growth when the time arises, and the construction sector is no different. Take some time to discuss your options with your current banking relationships and do not be afraid to look for new relationships if that is what is needed to find the financial support you need to keep your business healthy for the short and long-term.
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Greg has 20+ years of financial, operational, and leadership experience in various professional sectors with a focus on construction, development, and construction management.