Earl Harper had the opportunity to write about contractor financing and how it relates to President Obama’s intentions about putting contractors and subcontractors “back to work”. Below is Earl’s opinion that was published in statesman.com:
President Barack Obama has made several major announcements about his intentions to “put construction and building tradespeople back to work.” He specifically mentions using independent contractors and subcontractors, a number of them family-owned small businesses, for public works opportunities.
Unfortunately, the president is raising false hopes and expectations because he is not addressing a serious disconnect under current economic conditions. Many of these contractors and subs are not prepared or qualified to handle these public works projects at present because they lack working capital.
In large measure because of the conditions they have endured over the past few years, resulting in a lack of work that caused a lack of income, many contractors have exhausted their working capital.
Compounding the problem, they may not meet individual credit score standards required to secure adequate financing. Additionally, their companies may now have weak, problematic financial statements. Most bankers are not willing to accept this risk — especially during this period when new government regulations prohibit banks from putting these loans on their books. The credit issues and lack of working capital also result in the contractors not being able to qualify for the surety bonds necessary to participate in most publicly funded projects.
I have been asked where my data and proof come from. No bank will admit that it is unwilling to finance these contractors and subs.
Typically, the banks go through an application exercise with these prospective customers to act politically correct. This is the “AIDS or HIV of financing,” which everyone is afraid to confront because of stigma and embarrassment.
To exacerbate the situation, banks are able to borrow money today from the Fed while paying almost no interest. They are now able to buy treasury notes, generally paying about 3 percent with no risk. So why would they want to involve the bank in a loan at enormous risk— especially when the reserve requirements and penalties they would face, thanks to the Dodd-Frank laws, are so severe?
The Obama administration may be creating a huge paradox by opening up all of these public works project opportunities only to find that there are no contractors and/or subcontractors suitable to take advantage and participate. There’s a solution for contractors who want to work on these public-sector projects if their banks will not able to provide them with working capital.
Contractors should jointly work with nontraditional, commercial finance companies that specialize in providing working capital to pay job costs through the factoring of the contractors’ project receivables.
Those specializing in this area of high-risk finance also provide critical ancillary services such as funds disbursement programs, initial plan and estimate reviews, ongoing inspections, and more. Additionally, the contractor with this necessary working capital available should now have the financial strength necessary to qualify for surety bonds.
A capable, experienced, profitable contractor would have no problem going through the underwriting process to qualify to participate in this program. And, since the projects are publicly funded, the factor will have no problem approving the project owner, a public entity, for credit as the “account debtor.”
Obama’s back-to-work initiative for the construction industry needs an education effort. Contractors must learn how they can gain access to capital through nontraditional means and these forms of financing must be accepted throughout the construction and related financial service industries.