The best time to prepare for a financing conversation is usually before financing becomes urgent.

Construction companies may seek financing for equipment, working capital, expansion or other business needs. When that happens, lenders often want to understand more than how much revenue the company generates.

They want to understand the financial condition of the business and its ability to manage its obligations.

Preparing your financial information ahead of time can make that conversation easier.

Start With Current Financial Statements

Accurate, current financial statements provide a foundation for the financing process.

Before approaching a lender, review the company’s balance sheet, income statement and cash flow information.

Look for issues that could raise questions, such as:

• Old receivables
• Unrecorded liabilities
• Incorrectly classified debt
• Unreconciled accounts
• Inconsistent owner transactions
• Outdated asset information

Depending on the financing request, a lender may also have requirements regarding the level of financial statement assurance.

Determining whether internally prepared, compiled, reviewed or audited financial statements will be required early in the process gives the company and its accounting team time to prepare.

Take a Close Look at Work in Progress

For construction companies, a work-in-progress schedule can provide important context about current projects.

A lender may want to understand contract amounts, costs incurred, estimated costs to complete, billings and expected profitability.

Management should review WIP information for significant changes or inconsistencies and be prepared to explain what’s happening on individual projects.

A well-maintained WIP schedule doesn’t just help an outside lender. It can also give leadership valuable information about the performance of the business.

The construction financing material provided for this campaign similarly identifies WIP schedules, backlog and financial statements among information lenders commonly request. DBC – August Construction Blogs…

Understand Your Cash Flow

Profitability and cash flow aren’t the same thing.

Construction companies often incur payroll, material, equipment and subcontractor costs before receiving payment from customers. Retainage and billing schedules can create additional delays.

Before seeking financing, understand what is driving the company’s cash needs.

Are receivables being collected on time? Are approved change orders being billed promptly? Are project billing schedules creating predictable periods of pressure?

Knowing the answers can help leadership explain why financing is needed and how it will support the business.

Know What You Already Owe

Before requesting additional financing, create a clear picture of existing obligations.

That may include loans, lines of credit and equipment financing.

Management should understand current balances, payment requirements, maturity dates and any applicable loan covenants.

Having this information readily available helps leadership evaluate the company’s overall debt position before adding another obligation.

Make Sure Job Costing Supports the Story

Reliable job costing can help demonstrate that management understands how individual projects are performing.

If costs are missing, assigned incorrectly or based on estimates that haven’t been updated, the company’s financial information may not provide an accurate picture of project performance.

Review whether labor, materials, equipment, subcontractor costs and applicable overhead are being captured consistently.

The stronger the information behind the financial statements, the easier it becomes to explain the company’s financial position.

Know Why You’re Borrowing

Finally, be prepared to clearly explain the purpose of the financing.

There’s a significant difference between saying “we need additional cash” and explaining that financing will support a specific equipment purchase, provide working capital for a documented increase in backlog or fund a defined expansion.

Leadership should understand:

• How much financing is needed
• How the funds will be used
• How the investment benefits the company
• How the company expects to repay the obligation

Preparing those answers before meeting with a lender can make for a more productive conversation.

Don’t Wait Until the Need Is Urgent

Financial readiness isn’t only useful when a company plans to borrow money.

Keeping financial statements, WIP schedules, job costs and debt information current gives construction leaders better visibility into the business all year.

Then, when a financing opportunity or need arises, much of the groundwork has already been done.

HCJ CPAs & Advisors works with construction companies on financial reporting, audit and review services and other accounting considerations that can help businesses prepare for conversations with lenders and other financial stakeholders.