Rasheed Bonds is a self-described “product of the family business.” Eight years ago, he followed in his father‟s footsteps and started his own construction-related firm called Dynamic Wrecking. The company does commercial, residential and industrial demolition for municipal governments and private contractors. Bonds already has three employees and, by now, had hoped to be positioned for growth. Instead, he is fighting for survival.
Staying in business has become a daily struggle, Bonds said. Not only has the construction industry experienced a significant work slowdown, but slow- or non-paying clients have weakened their cash flow and profitability. Today, Dynamic Wrecking has become a case study for the many things that can go horribly wrong for a construction-related business in a bad economy. That includes a lack of access to working capital to replace aging equipment, pay suppliers, and make payroll.
“It‟s always been a struggle trying to get financial assistance,” Bonds said. “As soon as a bank finds out you‟re in the construction industry, they come up with a bunch of excuses,” said Bonds, who acknowledged that some construction companies haven‟t helped matters by abandoning projects after receiving lines of credit. “That has put a bad taste in the mouth of the financial industry. They think that every construction startup is going to do something negative.”
On the positive side, the construction industry has traditionally been a source of jobs that pay upwards of $70,000 a year without a college degree. But the recession has wreaked havoc on both construction jobs and contractors as more companies compete for fewer contracts and clients. Contractors used to be able to rely on their government clients for steady payments, but even they struggle with their own budgetary concerns.
For small businesses like Bonds‟, all of these things add up to weaker balance sheets, weaker profitability and weaker cash flow, and banks aren‟t going to loan money to a faltering business, said Bill Rucci (CPA, MST, CGMA), partner at Withum, in Boston.
“The construction industry has taken the biggest hit of any single industry out there. You‟ve got the banking community saying, „Can we trust this economy? Can we trust these companies? Are they really coming back?‟ ” Rucci said.
Rucci, who heads up the Construction Business Practice Group for the firm, consults with construction contractors to help them gain a better understanding of how to make money, how to get money and “how to truly understand what they‟re doing with the business.” Unfortunately, he said, many alternative financing providers – such as factoring companies, micro-lenders and peer-to-peer lending groups, look for the same signs of creditworthiness in business as traditional banks. A company with poor cash flow, credit issues, past judgments and no hard collateral will be challenged to get financing anywhere, Rucci said.
“What puts most companies out of business is a weak balance sheet,” Rucci said, “because they can‟t take the hit of slow-paying customers. In the end, balance sheet strength is the most important item that companies need to look at whether you‟re [in] construction or any other industry. That is what the banks are going to look at.”
These days, traditional banks are asking construction firms to put up collateral such as equipment but here, too, Bonds is challenged in a couple of ways. “Most of my stuff is either old or beat up,” he said. “It‟s hard to produce hard collateral when we don‟t get paid on time, all the time.”
Construction is a bell weather industry and an important barometer for measuring the economy‟s general health. But without evidence of a strong recovery, companies such as Dynamic Wrecking are essentially on their own. Without access to lines of credit or other alternative financing sources, construction-related firms may be doomed, which also hurts communities that potentially lose these good-paying jobs.
“We need for private-sector companies to step up and work creatively with businesses such as Dynamic Wrecking to ensure these firms are able to compete and create jobs in the communities they serve,” said Chinwe Onyeagoro, editor-in-chief of New Equity Business and managing principal of O-H Community Partners, a consulting firm focusing on small business, social impact, innovation and analytics. “This is critically important in communities of color where minority contractors are more likely to hire local people. We can‟t be satisfied to sit back and watch these companies fail at such a critical time in the recovery.”
Bonds is looking into other creative financing opportunities including performing demolition work for area businesses, developers, institutions and government agencies at a discount in exchange for advanced payments. Rucci said such creative arrangements may be possible on private jobs; public work might require bonding, which also speaks to a company’s strength.
“You probably can negotiate things on private jobs that would be atypical of what has normally gone on out there,” Rucci said.
Factoring and peer-to-peer lending are potential options, too, but the factoring companies and peerto-peer lenders must have faith that the company has the right management team and skills to work through the problems they are having, he added.
Bonds is certainly not alone in his agony. Contractors and other construction-related business have historically been subjected to an unfair share of work disputes, slow payments and judgments that can make it difficult – and sometimes impossible – to do business. But, like it or not, slow pay is part of the construction industry culture, and companies that are successful have learned how to mitigate these circumstances by putting money away and maintaining a healthy balance sheet, Rucci said.
The construction industry is volatile by nature. Rucci said he saw the companies struggle similarly during the recession of the late 1980s. Even when things are going well, construction-related firms have to always operate in survival mode. These days, a lot of construction firms are low-bidding jobs just to keep their employees working, breaking even if they’re lucky.
“The construction industry, for as volatile as it is, the owners are very savvy business people. They don‟t have an annuity type business. They‟re always bidding new work and having to prove themselves week in and week out. Understanding how profitable they need to be is something they have to be in tune with.”
Successful companies have learned how to plan for the volatility of the industry by keeping debt down and “not going crazy spending money,” Rucci said.
“How you deal with suppliers and customers who are not paying you in that 30-day period is [part of] having a strong balance sheet,” he said. “You‟ve kept your debt down to a reasonable level, been able to put some money away, you‟ve made changes in your personal lifestyle and taken a good hard look at what your overhead structure is so you‟re not paying anyone more than you have to to get the job done.”
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