Construction finance company offers integrated payment solution with flexible terms
It’s no secret that the construction industry has historically been hindered by a dysfunctional supply chain finance model. Contractors purchase materials upfront, install the materials, then get paid for their work 80-100 days down the road. The burden is generally shared between two parties: the supplier by providing terms and the contractor by using valuable cash flow. And, if the overall problem is not enough to digest, there are additional consequences born from the initial dysfunction.
SUPPLIER DIFFERENTIATION
Suppliers/distributors are responsible for selling their products to their customers at a modest margin. The natural competing forces for this type of business are excellence in logistics, inventory management, product line offerings, product support, pricing options, and customer service.
Unfortunately, for a large segment of their customers, the primary driving force behind a sale is available credit terms. You could be world-class in all areas of material logistics, but if you cannot offer 60 or 90-day terms then your customer is forced to use an outside purchasing option. All of a sudden, your primary differentiation has become lending, which is risky for a supplier.
PRICE DISCOVERY
As a supplier, you work hard to support your customer and in return gain their loyalty. You are not always the cheapest but your customer values your support, product, and execution. Even in cases when you are not offering the lowest price, you’ve earned the haloed “last look,” which means you’ll have an opportunity to flex on pricing when your customer needs it.
When a customer grows quickly, their need for a higher credit line also magnifies, but your hands are often tied. This forces your customer to buy routine product from another supplier and take notice that they are $5 cheaper per drum on their favorite product. Not to mention they get access to a new credit line that is larger and unused.
You’ve worked hard for this customer, day in and day out, supporting their every need. You’ll even match the drum pricing, but by now your customer is intrigued by their new supplier pricing and decides to rebid all of their products.
SALES AND COLLECTION
I’ve had the benefit of working with some of the best suppliers in the country. They knew their products backwards and forwards, worked all options to help us secure large projects, and most importantly, were reliable resources when we needed them most.
Our supplier representative was always a welcome sight in the office or at a jobsite. Except that one time every few months when he was carrying a stack of invoices … on collection day.
Every supplier and subcontractor knows this visit all too well. Maybe there are past due invoices or they’re approaching the limit on their credit line. Sure, there may be some invoices that simply slipped through the cracks or that include small items that need to get cleaned up before being paid. But for many contractors, this visit comes regardless of whether or not they have been paid on a project.
The collection visit isn’t there to help the customer get the next big project or work through a project change; it’s simply to shift the pain from one player in the supply chain (supplier) to the next (contractor).
This breaks down the relationship unnecessarily and creates a complete dysfunction as it becomes a standoff between customer and supplier. Neither party is built to float the delay and they don’t have a mechanism to relieve the cashflow burden they find themselves in.
POTENTIAL SOLUTIONS
Solutions in the industry have historically been bank lines extended to contractors or factoring pay applications with a general contractor.
Most contractors can obtain bank lines at attractive rates, but banks typically require blanket liens on assets that become cumbersome to secure additional financing for down the road (bank terms often require “permission” for the company to take on additional debt as a condition).
Factoring is always an option but has such a negative connotation that if the general contractor or supplier discovers a contractor is factoring, they assess the business to be in financial distress.
Billd was founded to solve this problem. In very few other industries does the financing fall so heavily on two parties within the supply chain. Billd offers a “Bill Me Later” type option for suppliers to remove credit and risk as part of the equation.
Billd removes the challenges contractors face purchasing construction material by partnering with suppliers to offer an integrated payment solution with flexible terms for the contractor. Suppliers get paid how they want, when they want, while providing their customers a financing solution to purchase today, and pay over time.
There are many capital providers that are highly interested in the construction space, but most stay on the sidelines due to concerns about the viability of contractor borrowers. Strong performing financing will be what ultimately drives the broader availability of financing across the construction sector.
About the author:
Chris Doyle is the president and CEO of
Modern Contractor Solutions, February 2019
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