Subcontractors have a host of working capital options to choose from: lines of credit, cash, credit cards, construction-specific financing, supplier terms, and more. As they cover all the capital needs of the business, subs have to be strategic and intentional, deciding which source of capital makes the most sense for each purchase. For subs who do have a strategy, it’s worth re-evaluating as the business grows and your working capital toolkit evolves with more options or higher limits.
Billd hosted a Subcontractor Meetup where Travis Mayor, Director of Strategic Partnerships at Billd, and Jerry Aliberti, Principal at Pro-Accel, discussed how to develop a capital deployment process, outlining tried-and-tested principles you can easily implement in your own business. Here are their top 3 principles to live by.
Principle #1: Be Intentional When You Choose A Payment Option
Every decision related to using capital should have strategic reasoning behind it. You should always have a clear plan for how and when to use each form of capital and the expected return associated with the expense.
You should have these systems and processes in place at the project level and the overall operating level. This approach ensures that your capital options amount to good debt, and that your options work for you, not against you.
Principle #2: Use Capital in Order of Least to Most Flexible
A common mistake we see among subs is using their most flexible capital options, like cash and lines of credit, first. Using flexible forms of capital first may seem intuitive, given how easy or relatively cheap they are to use. However, you open yourself up to risk by removing your flexible options early on.
When you make this mistake:
- You take away the options you may need down the line.
- It eats up your easy-to-use capital with non-urgent expenses, which can limit your ability to take on growth opportunities as they arise.
- If an emergency strikes, you’re left with only your least flexible options and their limited use cases, which puts your business at unnecessary risk.
- Maintaining capacity in your flexible working capital serves more purposes than just payment. For example, if you eat up your LOC with project expenses, you limit your bonding capacity.
Instead, use your more rigid options like supplier terms, material financing and Pay App Advance early, leaving ample runway in your cash and lines of credit. They are considered rigid because they can only be used in one way. But “inflexible” doesn’t mean “undesirable.” It just means these options were tailor-made for this expense and you should use them for their intended purposes.
This strategy helps you safeguard your most flexible options to handle all the unpredictability and curveballs of the construction industry. Payment cycles in construction are always slow, stretching subs thin. Given all this uncertainty, if your cash and line of credit are used too early and liberally, your working capital buffer is diminished, making it harder for businesses to navigate financial headwinds.
Principle #3: Deploy Capital for the Right Kind of Work
To round out a strong capital deployment strategy, you need to take a hard look at the work you’re deploying capital for. If the work you’re bidding isn’t as profitable as expected, then even the right deployment strategy can’t make that a smart use of working capital or resources.
So, prior to refining your capital deployment strategy, make sure you’re going after your most profitable work. Aliberti recommends that you cultivate a deep understanding of your current state, and fix whatever needs to be fixed, because we all can work better than we did on our previous project.
A defined working capital strategy is crucial for maintaining financial health and fostering growth in your subcontracting business. For more tips on how to protect your profits and create a stronger, more resilient business, watch the full Meetup on demand.
