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The construction industry is notorious for perpetually slow payment cycles. Payment terms across various industries and supply chains are extending as Buyers look to stretch their cash flow for as long as they can. In particular for the construction sector, project managers focus on lengthening working capital to the furthest extent. As a result, contractors are put in a tight position where they struggle to pay their suppliers on time and in some cases even to turn a profit. Cash flow gaps are very common in construction. According to a Kabbage survey of construction firms, 28% cited cash flow as the biggest challenge during their first year in business, outweighing finding new customers. There are many reasons construction companies struggle with cash flow management such as seasonality and demand fluctuation, excess inventory, equipment maintenance, labor, etc.
All construction projects are packaged with some level of risk. Subcontractors suffer the traditionally long and uncertain payment waiting periods that are prominent for construction. This generally is followed by tight cash flow margins which can hurt supplier relationships as well as other relationships like with project owners. Without the cash flow to fund existing projects, companies are further handicapped and unable to take on new work, hire new employees, or focus on business growth. In other words, they are in a business stalemate.
According to the “2017/2018 Working Capital Study” by PricewaterhouseCoopers, the median days of sales outstanding (DSO) metric for engineering and construction was 84 days – the longest of any of the 17 major sectors studied. Squeezing suppliers is not a good idea with late payment especially when the cost of a bad relationships can be high.
Fortunately, there is a solution for the construction industry to accommodate the traditional project cash flow pain points. Supply Chain Finance solutions provide a unique way for companies to optimize cash flow management for all stakeholders involved in typical payment processes. Many subcontractors are turning to Supply Chain Finance as a way to tackle these particular set of challenges the construction industry faces. As supply chain finance takes ground in the construction industry, it is becoming more and more common for subcontractors to lean into SCF solutions to serve their suppliers with timely, predictable and consistent payments.
In practice, supply chain finance enable Buyers to improve their working capital position and Sellers to receive accelerated payment which thereby enhances their cash flow position. In construction, this means that a general contractor works with the supply chain finance provider to arrange payment on invoices. Once terms are approved and agreed upon by all stakeholders, the subcontractor receives early payment. By the time the owner funds the invoice payment, the contractor repays the supply chain finance provider company.
SCF provides flexibility for Buyers and security for Sellers. It is a cost-effective solution for the construction industry that reduces that financial strain on subcontractors and bolsters balance sheets. Supply Chain Finance can help position construction companies to improve efficiencies to promote success across the entire length of the supply chain.
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For more information about how TradeRiver Finance can help bridge the cash flow gap with a revolving credit facility to keep your business growing and supply chain moving, contact us at info@traderiverfinance.com!