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4 Reasons Why You Should Use Financing – Even If You Have Cash in the Bank

Read time: 5 minutes
Published: May 28, 2024
Last updated: June 17, 2024

Being financially stable is all about your cash flow, how you manage risk, and the working capital options you use to run your business. 

A working capital stack that includes cash, lines of credit, material financing, and supplier terms allows you to pull from different sources of capital based on your business’s specific needs and goals. Additionally, having these options in place before you need allows you to be proactive and gives you financial flexibility if you hit unexpected cash flow problems. 

Relying on cash alone might seem ideal because it looks like a “no-cost option,” but there are costs to using cash. Where else could you spend those dollars if you had them in your hand today or tomorrow? While there’s no interest associated with spending your cash, you’ll get the biggest return on investment if you use it to fuel your business growth instead of covering all your expenses.  

When used strategically, financing can help you accomplish the following: 

  • Better relationships with suppliers and GCs
  • Diversification and access to capital – before you need it
  • Increased operational efficiency and risk management
  • Profitable business growth

Here’s an overview of what financing can help you achieve that can’t be done with a cash-only working capital strategy.

1. Better Relationships with Suppliers and GCs

Construction is all about relationships. Building trusted two-way relationships with GCs, vendors, and even with your own internal team is incredibly important. 

When it comes to working with suppliers, paying upfront and in full with cash can get you discounts, but material financing can also help you unlock these cash discounts while keeping cash available for other areas of your business. 

Material financing can help you with material purchases that are outside your normal buying patterns or with vendors you may not have substantial terms or credit limits with. It can also help you with large strategic purchases, allowing you to negotiate on the front end with upfront payment. Any of these tactics can help you build relationships with new suppliers while preventing you from putting your cash on the line. 

 Whether they explicitly say it or not, GCs prefer subs who use financing.

What GCs really want is to trust that their subs are performing on the project and managing finances effectively.

Using material financing allows you to focus on delivering great work instead of scrambling to cover any cash flow issues that might arise from unexpected project delays. 

2. An Optimal Plan for Using Capital

Every financing option – lines of credit, material financing, and cash, to name a few – has optimal and suboptimal ways to be deployed. Ideally you’d rely on your least flexible financing option first with the most flexible being your last resort. For example, because material financing can only be used for materials, use it as a first resort for purchases. Reserve your more flexible options, like cash, for emergencies. Maintaining a mix of financing options prevents you from leaning on your safety net, first.

Additionally, you want to have options available before you need them. Working capital options take time and effort to acquire, but cash flow challenges can quickly turn to disasters. This is why you want to secure additional options well before you need them. If subcontractors who are healthy enough to secure financing fail to have a capital stack in place and later get hit with steep project or payment delays, these delays can strain their cash flow and deeply affect their long-term growth goals. 

3. Increased Operational Efficiency and Risk Management

As a sub, you are expected to manage an unpredictable payment cycle and act as the bank, funding the project. Having a capital stack that includes financing can help you increase operational efficiency because you will no longer be subject to long, sometimes unpredictable payment timelines or have to redo your financial planning if something unpredictable affects your business. You’ll know when you can pay vendors, buy new equipment, and onboard new hires for larger projects. 

Because subcontractor receivables are subject to project conditions (i.e. the owner is slow to pay the GC, schedule delays, etc.), payment can not only be slow but, on occasion, not guaranteed at all. With every project comes the potential for: 

  • Payment delays
  • Schedule disruptions
  • Unexpected costs/margin erosion
  • Undercompensated change orders
  • Strung out retainage
  • And much more

To mitigate these risks, a sub can try to negotiate better terms upfront in their contract. But, financing can also help manage some of these risks by giving subs more options for finding financial flexibility.

4. Business Growth 

Responsible financing provides subcontractors with the capital needed to grow. (The emphasis needs to be on “responsible” as there is a big difference between good debt and bad debt.) If you were able to get a $1.50 return for every $1 you invested, would you only invest how much your cash would allow? Or would you want to find additional financing that would allow you to make a larger investment? It’s common for businesses to use financing to accelerate their growth. Here’s how responsible financing can help you do the same. 

Your growth plan, which is built by delivering great work for GCs and using those relationships to get more projects, will eventually demand a higher capital investment in the form of:

  • Materials for larger, more complicated projects 
  • New or additional equipment
  • Higher labor expenditures
  • Increased overhead

As expenses increase and you continue to wait on accounts receivable, your working capital and cash flow are strained, making it difficult to cover immediate expenses let alone invest into resources for the business. After all, your cash serves as a “speed limit” to your growth – you never know what opportunities lie ahead and what cash you may need available to accept them. But with more options in your capital stack, you have more financial flexibility. Plus, you can worry less about covering the upfront costs related to taking on more projects and focus on delivering your best work (and using that to get more). 

You might be concerned about the cost of financing cutting into your margins. The cost of financing, or any other working capital, should be accounted for in your bids, a strategy that can help insulate your bottom line. This concept is similar to a tactic GCs might use to include an interest charge on their invoices if payment from an owner falls outside of the payment terms included within their contracts. As a GC said during one of our roundtables, “This country was built off of people making money with other people’s money so I wouldn’t have a problem with it. I think it’s about the way you run your business and how it makes sense for your cash flow. If financing is something you can use to help your situation, I don’t have a negative view of it at all.” You should account for the proper costs to perform on the job, manage your risk, and maintain your margins.  

In fact, many of our most successful clients include the cost of financing within their bids, a strategy that makes them 11% more profitable than subcontractors who don’t include this cost, according to the latest findings from our 2024 National Subcontractor Market Report. While this isn’t industry standard yet, 48% of subcontractors surveyed are including the cost of capital in their bid. 

There’s a saying,

“Contractors don’t starve, they eat themselves to death.”

Subcontractors need to be discerning about the projects they take on and the sources of funding they use. Thinking strategically about financing and maintaining a mix of working capital options can help you grow your business, mitigate risks, and improve operational efficiency in a way that cash alone can’t. By understanding the benefits of financing and using it strategically, subcontractors create a more predictable payment environment that gives them the flexibility to invest back into their businesses. 

About Billd: At Billd, we provide a payment solution that enables commercial construction contractors to free up cash for material purchases while enjoying the flexibility of 120-day payment terms. You get financing for commercial materials upfront with the freedom to pay it back at your own pace. Learn more about how we can help eliminate your company’s cash-flow problems so you can win more bids and grow your business.

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Travis Mayor

Travis is the Director of Strategic Partnerships at Billd. He thrives in guiding subcontractors through the intricate landscape of financial management, offering tailored solutions to enhance cash flow efficiency and maximize profitability. His mission is to empower commercial subcontractors with the knowledge, tools, and resources they need to thrive in today's dynamic business landscape.

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