Working capital is the difference between current assets (what you own) and current liabilities (what you owe). Metaphorically, it is the fuel that keeps the engine running. Without it, it would be difficult for a company to continue its operations.
Furthermore, it can be positive or negative. However, negative working capital does not necessarily mean a company is going bankrupt. Positive working capital, on the other hand, means that a company's assets exceed its liabilities. This will help you meet your tax obligations, pay your debts on time and purchase raw materials.
Furthermore, positive working capital also means that your company will be able to effectively weather any financial difficulties in the construction industry. However, it is difficult to maintain, as some unforeseen costs may arise during the construction process.
If this is the case, it would be best to find a way to increase your working capital to mitigate the unpredictability of the construction sector. So what are these ways and how can you sign up?
In this article, you will discover some of the most effective ways that will help you increase your working capital.
1. Open a working capital line of credit
The working capital line of credit is what most companies use to invest and increase their working capital, rather than purchasing a specific material. Additionally, it allows businesses to request immediate cash up to a certain amount, helping them fill unpredictable gaps in cash flow.
Here are some situations that may require a working capital line of credit:
- Covering miscellaneous construction costs
- Pay employees' salaries
- Increasing daily cash flow
But like any loan, what was borrowed must be returned within a specified period of time. Otherwise, you will lose your chances of applying for a loan again.
Additionally, a working capital line of credit will allow you to only pay back what you use. For example, if you borrow an amount of $50,000 and only 25% of it has been used, you will only have to pay back 25% or $12,500.
Once you've completed paying off your debts, your line of credit will reset to its original amount, which you can borrow whenever you want. This is why they are also called “revolving” lines of credit.
2. Implement progressive billing
Progress billing is an invoice most companies use to receive payment for a completed portion of a project. It can be prepared and disseminated to clients at different stages of a long-term project.
Additionally, progressive billing is generally used for large projects, particularly in the construction industry. This helps contractors improve their working capital and maintain cash flow they can use to finance their projects on an ongoing basis.
Additionally, the invoice you need to prepare may include the original contract value, the amount your client has paid to date, the total amount to be paid, and the work progress in percentage. With this, you will have enough resources to support your projects and you can be sure that your projects will not stop midway.
3. Use material financing
As the name implies, materials financing is a way to help contractors finance the construction materials needed to complete their projects.
When purchasing building materials from your supplier, you can use materials financing to pay for the initial costs of your purchase. A third-party materials financing company will pay your supplier on your behalf.
Once the supplier receives payment, they will provide the necessary building materials as quickly as possible. But of course it comes with a manageable interest rate, which will also make the finance company happy.
Additionally, material financing companies often offer flexible payment terms. Typically, the payment period can last up to 120 days.
4. Request advance deposits
Requesting an advance deposit is standard practice in the construction industry. Protects contractors from defaulting customers and maintains balanced working capital, keeping the company afloat.
Essentially, an advance deposit is an advance that a client pays before the project begins. The sooner the client pays, the sooner you can start the project. Additionally, requesting deposits in advance can help you improve your equity balance and reduce debts that may weigh you down in the first few months of the project.
5. Claim Employee Retention Credits (ERC)
The Employee Retention Credit was developed in 2021 to help businesses by providing them with cash assistance to support their employee payroll. With ERC, you will be able to improve your working capital while retaining all your employees. You can claim up to $7,000 per employee per eligible quarter.
So who is eligible to receive ERC assistance? To be considered eligible for credit, a company must meet one of the following criteria:
- Companies that have partially or fully suspended operations due to mandatory government restrictions
- Companies that have suffered a significant loss of revenue
Once qualified, you will receive cash assistance based on the number of your employees and your nominal share.
6. Use a purchasing card
A purchasing card, or 'P' card, is a commercial card generally available from banks. It allows businesses to leverage their existing credit cards to make payments to support their business expenses.
With a P card, you will be able to pay your suppliers on credit. Then, all you need to do is accumulate enough funds to pay off your credits and replenish your card balance.
In the simplest terms, a P card is like a regular consumer credit card. However, you must pay the borrowed amount in full every month. It does not have 12 and 24 month installments like normal credit cards, but it can be negotiated with your bank.
Additionally, some P cards may offer cashback rewards and other incentive programs that can add an extra boost to your working capital. You can talk to your local banking institution to find out more about this.
Final Words
Working capital is the driving force that helps keep your business running. Without it, you won't be able to pay your debts on time, pay salaries to your employees, and bear unpredictable construction costs and delays.
That being said, you can consider the following methods discussed above to improve your working capital. But don't forget to pay your debts on time to ensure you can borrow or lend again in the future.
