Financing growth: Questions for construction businesses navigating loans

According to analysis from StorageCafe of the U.S. Census, Yardi Matrix and CommercialEdge data‡, Fort Worth clocks in at number nine in terms of the top 50 U.S. cities for real estate development in 2024. Most living in the Fort Worth area wouldn't need that statistic to know it to be true; area residential and businesses communities are thriving.

Despite the explosive growth in the area, finding the right bank to work with as a construction company can be a challenge. Why? For starters, it is an industry that can experience a lot of variation as revenue is project-based, which means volume can vary from one year to the next. Construction is also impacted by other variables like weather conditions, the broader economic environment, interest rates, and vacancy and absorption rates which are largely outside of a contractor's control.

To find the right fit in a bank, begin by noting the intricacies of your business. The three questions below can help outline the structure and supports to consider when reviewing your banking relationships.

Question 1. What are your businesses unique/specific banking needs?

Even within the construction world, there are differences in the way companies approach business. For example, general contractors versus subcontractors.

Typically, general contractors have fewer hard assets or "collateral," and fewer financing needs to run their business. In this case, a banking relationship might focus more on setting up accounts receivable solutions like online payments and ACH capabilities.

In the case of subcontractors who are normally buying the tools and equipment needed to perform their portion of a construction project, there may be a need for bank debt to support those costs.

When it comes to securing financing, banks will generally want to understand the timing and consistency of revenue and profit margins from year to year. For example, how much of the company's work is won through competitive bid vs. negotiated bid? How much revenue is tied to any one customer? Additionally, providing a backlog, as well as a summary of projects in various stages of negotiation, can provide insight into a company's future performance. Ultimately, a bank will want to understand how your company has historically performed, and how likely that performance is to continue.

Question 2. What processes do you need to simplify?

No matter how smooth a business is running, the right banker can help keep owners up to date on the new technologies and systems that can help maximize cash flow and processes.

One trend we are seeing in construction is moving away from writing checks to using Visa Payables Automation, or VPA. This is often a good fit for construction companies, as they have many payables to manage. VPA can be used to automate the procure-to-pay process and can enhance reconsolidation through reporting. Setting this up can protect both your company and the recipient.

Question 3. How are you protecting your business from financial risk?

Construction companies are very familiar with the need for risk management tools specific to the industry, but they should also be thinking about how to manage risk when it comes to their bank accounts.

In today's world, fraud is unfortunately a common occurrence. However, there are many tools and resources available to protect companies. Banks are generally eager to discuss a company's payment processes, any fraud risks associated with those payment types, and protections that can be added to protect against bad actors. For example, if you write a lot of checks, there are tools such as Positive Pay that can be utilized to protect against attempts at check fraud.

Nailing down answers to the above questions can be a helpful step for construction companies vetting potential banking relationships.

Solutions for success

The big picture is that construction companies want a bank and banker that understand their business as well as the construction industry and its ebbs and flows. UMB has banked the construction industry since our inception in 1913, and we recognize each client has unique needs, which is why we offer customized solutions for every business type and industry.

With the recent Fed rate cuts, we anticipate there will be an upswing in construction projects soon, making now an ideal time to begin the process of reviewing your current banking situation. If you are sidelined right now with your construction financing, reevaluate what your needs and complexities are and create a game plan alongside the right institution.

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