3 cost-free ways to handle late payments
These tips can help contractors manage cash flow
There are few things more stressful than late payments and the cash-flow problems they inevitably create.
A whopping 88 percent of contractors say they have to wait longer than 30 days for payments, with 46 percent using business or personal savings and lines of credit to cover the cash flow gaps.
The time and hard costs involved in securing funds and handling cash-flow issues in the interim averages out to 3.3 percent of total construction project costs—an astounding $40 billion annually.
Short-term loans, lines of credit and offering early-payment discounts are common ways to manage cash flow. But there are also some lesser known techniques to bridge those gaps.
Here are three simple-but-effective solutions for mitigating cash-flow issues.
While the long-time industry standard has been for clients to pay their bill in three or four large installments over the course of the job, John Montijo, a Staten Island, New York-based specialty contractor, breaks his invoices up further. He now bills after each step of a job: for demolition, sheetrocking, windows, insulation, plumbing, electrical work and so on.
“It took me a few bad years to figure that out,” Montijo says. “But this way, you’re always ahead of the game.”
This often solves the problem of Montijo paying his subcontractors on time. And his customers don’t mind it, either. “Let’s say it’s a hundred-thousand dollar job,” he says. “Instead of a customer coming up with $25,000, maybe I’ll ask for $10,000.”
In addition to helping with his cash flow, it frees Montijo from having to bill up front, which customers also like. “We’ll do the demolition, and they’ll see, ‘O.K., they started the job,’” he says. “They’re not having to write those big checks to me up front, which can be scary.”
Seek out an anchor client.
When Greg Mills took over Phoenix-based company Bernie’s Brass—now doing business as M3 Metals—two years ago after a career in the software business, he was taken aback by the cash flow challenges inherent to the construction industry.
Mills’s company primarily subcontracts to larger firms, which means he’s regularly relying on lines of credit or short-term loans to bridge the gap while he waits for payments to trickle down to his company. That works for now, but one way Mills is seeking to balance out his ledger in the long-term is to find more end customers.
Mills landed one: Hillstone Restaurant Group, a national chain for which M3 now does most of the brass work. Some of the jobs he does for Hillstone are small, but they’re worth it for the cash flow alone. And when they do have a major job like a remodel, it can be beneficial.
“They’re a good customer,” Mills says. “And because they’re not a contractor, they pay faster, and probably better than most.”
Find understanding suppliers and be loyal.
Diana Lewis and her husband started their Jacksonville, Florida-based company, D&J Erosion Control Specialists, after recognizing demand for such specialization on highway construction projects.
Because many of their jobs are with the government, Lewis has become accustomed to waiting 60 to 90 days for payments to come in. And she realized over time that simply establishing trust with her suppliers can make all the difference.
“I have one supplier that I know will let me go 60 or 90 days before they start saying something,” Lewis says. “So, I knew I could push that bill back and take care of payroll and other top priorities. Any bill that you can push back, you do.”
With these tips in mind, you can reduce the stress that comes with late payments. Steady cash flow is vital for any business, no matter the industry or size, so stay ahead of potential problems with the right strategies and access to fast, flexible capital.
This article originally appeared here.