Construction Finance - Key Tips For Small Business
Small construction and contracting companies have to continuously improve and adapt to increase margins, reduce operating costs, improve cash flow, and bring in operational efficiency that can help them stay financially fit. Here are seven key strategies that will help you keep your construction business in great shape:
1. Optimise costs
Having the right vendors and suppliers is critical for long-term business success. In addition to sourcing quality materials, ensure you are getting it at the best price. Negotiate with your suppliers to save on costs as your business relationship grows. In addition to positively influencing your bottom line, it can also help you pass on the benefits to your customers and attract more business.
2. Transfer project risk
Refrain from using business funds or a line of credit to fund an entire project. Front-load the contracts to receive a higher sum in the beginning. This way, most of the initial cost and risk would be borne by the client rather than you, the contractor.
3. Establish a payment schedule
To minimise cash flow disruptions, establish a payment schedule with clients that is commensurate with the percentage/ stage-goal completion of the project. Enforce this by means of identifiable milestones that are spelt out in the contract. This ensures that you are not stretching your resources in case of a shortfall, nor can your business be held liable for delays or missed deadlines.
4. Budget for a contingency fund
Unpredictability is a part of the construction business, and unanticipated issues such as building errors, equipment breakdown, damage, personnel issues, etc., have been known to bleed businesses. Factor in a contractor’s contingency into your project funding to account for unforeseen risk variables that cannot be factored into your schedule of values. Depending on the project's scale and tenure, you should earmark anywhere between 5% and 10% of the total project cost towards a contingency fund. Transfer this corpus into a money market fund that can be accessed easily as and when required.
5. Pay attention to materials management
Materials management is a critical cost centre for construction businesses, and inefficient management can eat into your profitability. If the materials are purchased well before they are required, you will end up blocking capital and incur additional interest charges (if sourced via funding), which will also add to your holding and storage costs. Conversely, shortage or delays in getting material on-site will cost you by the minute as other resources remain idle. Irrespective of the scale of your business, you need an inventory management system that can monitor the availability and use of materials while also minimising wastage.
6. Maximise on-site productivity
Whether it is excavating sites, paving roads, or laying concrete, on-site productivity can be measured as functional units of progress achieved per hour for a specific construction task. Having a dedicated floor manager who can log and quantify the data on a daily basis can be an invaluable resource for the future as well. This data can be used to benchmark your performance against industry standards and ensure that the resources for a project are managed effectively. This will enable you to deliver results within the budgeted cost and approved timeline.
7. Consider leasing equipment
Heavy construction equipment such as excavators, cranes, backhoe loaders, etc., can be very expensive, so it might make sense to lease rather than buy. The general consensus in the construction industry is: if you are not using the equipment 60% to 70% of the time, you are better off leasing. However, there are many other internal and external factors to consider, such as the size and book strength of your business, cash flow projections, contracts anticipated/in-hand, opportunity cost, etc.
Given the diverse and complex needs of construction and equipment financing, you need to consider the right banking partner. With HDFC Bank, you can avail Commercial Construction Equipment Finance on an entire range of equipment at attractive interest rates. Get 100% financing for a range of machinery, vehicles, and construction equipment at flexible repayment terms. And to expand your business further, you can avail of an HDFC Bank Business Loan up to a maximum amount of Rs. 50lac at very affordable interest rates varying from 11.5% to 24% and conveniently repay it over the course of 12 to 48 months. HDFC Bank Business Loan also offers an Overdraft facility without any security.
To apply for a Commercial Construction Equipment Finance, click here.
To apply for a Business Loan, click here.
Read more about the Equipment Loan benefits here.
*Terms and conditions apply. Equipment Loan and Business Loan at the sole discretion of HDFC Bank Limited. Loan disbursal is subject to documentation and verification as per Banks requirement.