Kabbage’s Cash Flow Management Tips for a Healthy Business
BY Aditya Narula
When small business loan company Kabbage offered to discuss cash flow management for contractors, AsphaltPro had a few specific questions the team was happy to answer. For asphalt paving or pavement maintenance contractors who have vendors or suppliers to pay in between project completions, cash flow can be an issue. Here are some words of wisdom from Kabbage’s head of customer experience.
Q: For the smaller paving company functioning as a general contractor on a residential or commercial project, what are the pros and cons to paying subcontractors—such as stripers, mills, concrete curbers—in 30 days, whether or not the project is complete or the customer has paid?
A: The biggest con would be that the general contractor may not have been paid by the client within the 30 days and paying subcontractors without working capital on hand can be difficult on finances for the whole company.
On the other hand, making it a policy to pay subcontractors in 30 days can be a great way to enforce healthy cash flow practices. If you pay your subcontractors within 30 days it means you would have to be very on top of your cash flow and finance management. Always being prepared and one step ahead of any cash out scenario is crucial in case of any unexpected expenses or crisis in your business. Since the general contractor is obligated to pay the subcontractor regardless of whether they have been paid by the client, it is important to be on time for your payments so you can avoid your subcontractors filing a mechanic’s lien or suing you for breach of contract as well as avoid violating trust fund law. Enforcing a 30 day rule for your business may keep you accountable.
It can also be helpful during seasonal peaks when subcontractors are high in demand and you are competing with other general contractors for the best talent. If subcontractors trust you more to pay them on time, you may get the advantage in hiring and keeping good talent.
Q: How can the smaller paving company protect itself from financial hardship when a larger project has multiple components, thus multiple subcontractors and vendors to pay?
A: With so many components of a project moving simultaneously, it’s important to make sure you have all the moving pieces of your business in check, too. When you have a detailed budget for the year, you will have a clearer picture of how each project component can best contribute to your company’s healthy cash flow and protect it from financial hardship.
Plan to pay your company’s predictable expenses, like quarterly taxes, marketing costs and insurance premiums, when big bills for your project are not due. Additionally, if you invested in capital equipment, you may be able to claim depreciation and other write-offs to minimize quarterly tax payments and free up cash.
You can also work with your accountant or use tools to analyze your finances and make small adjustments to smooth out the peaks and valleys in your cash flow. An easy place to start is taking advantage of upfront payment discounts and making sure you have access to funding for those inevitable unexpected costs.
There are several options for getting extra funds. Depending on your needs, you may choose an SBA loan, alternate lending, a commercial loan, peer-to-peer lending, a line of credit or asset-based financing.
With so many options, it’s important to know the pros and cons of each. SBA loans and bank loans tend to feature cheaper and more generous loans, but underwriting requirements can be strict. It can take a long time to process a traditional loan. Online lenders are faster and easier than bank loans—though they may come with higher rates.
Do your due diligence to figure out what funding solution is right for your business.
Q: What tips can you suggest for the smaller paving company when planning for seasonal employee wages and benefits so the owner can keep quality/trained personnel on hand during the height of season?
A: Hiring is essential for any growing business, large or small. Ineffective hires and employee turnover can potentially cost your business 30 percent of its yearly earnings, according to the U.S. Department of Labor. Instead of bargain shopping for employees, use additional funds to invest in the right hiring platforms, post multiple job listings, manage payroll, and cover onboarding and training costs. You could also use funds to give current employees a bonus for referring talent, or simply to help retain them.
A longer cash flow cycle can hurt your cash flow. This applies doubly during the height of the season when you need to invest in your company and personnel to get the bigger contracts that sustain the business for the rest of the year. One way to shorten your cash flow cycle while also improving your customers’ experience, in any season, is to break up your invoices.
Customers appreciate prompt, smaller bills because it helps them manage their own cash flow. John Montijo took several years of trial and error after starting his construction business in Staten Island, New York, to figure out the best way to ease the burden on his business and his customers. Montijo realized that he didn’t have to follow the industry standard of billing in three or four large installments over the course of a job. Instead, he broke his invoices up further, billing after each stage of a job: for demolition, sheetrocking, windows, insulation, plumbing, electrical work and so on. Instead of writing a check for $25,000 on a $100,000 job, his customers can pay $10,000 at a time, a cash flow win-win for both sides.
A shorter cash flow cycle helps you have more working capital on hand to make sure you can pay your employees on time and offer them more perks and benefits.
Q: What is the No.1 cash flow concern to guard against? And how can the owners protect the company?
A: The number one cash flow concern is simply not having cash on hand to strategically manage your company. It is important to diversify your funding options to reactively guard your business against crisis as well as proactively seek and take advantage of opportunities to grow and prosper.
Buying smaller increments of inventory, hiring staff during busy seasons or requiring payments for orders up-front are all steps you can take to prevent cash flow gaps and maximize the funding you can use to invest back into your business.
Q. How is Kabbage working in the industry to help small businesses with cash flow challenges?
Kabbage helps you cut through the red tape to get the construction funding you need to set your business up for success. Funding from Kabbage provides companies with access to a line of credit of up to $250,000 through a fast, simple application that’s fully automated. Provide basic data and Kabbage will review your business performance to give you access to funds.
“The thing with bank loans is that they don’t loan you money unless you don’t need it,” said Dennis Moloney of Best Restorations in Delray, Florida. “Over a year ago, I applied for a Kabbage line of credit and the next day, I was using it for my business. That’s a big deal because sometimes, we don’t get paid until a job is done. It can stretch out for four to five months and we end up waiting a long time.”
A line of credit can allow you to take only the amount you need when you need it, and then pay back just that amount you borrowed. It’s important for any construction business to have a secure source of funding ready and available for when you need it.
“Kabbage makes life comfortable for me. In 14 years, I’ve never bounced a check or been overdrawn, and I want to keep it that way,” Moloney continued. “I borrow to make sure I’m always looking good.”
Aditya Narula is the head of customer experience at Kabbage. Kabbage has pioneered a financial services data and technology platform to provide access to automated funding to small businesses in minutes.