10 Ways to Raise Capital for Your Construction Company or Other Service Business

Published: 10th February 2009
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There are myriad sources that construction companies can access when seeking working capital for business or funds to grow the business whether that is to broaden the geographical area, expand the array of services, or pursue significantly larger contracts. (Acquisition financing is not covered here.) I have covered many of these sources in previous articles. However, the question sometimes is, "What options should I pursue and in what order?" For construction companies, the answer lies below.

Follow these steps to procure financing to grow your business

1. Personal finances.

2. Friends and family.

3. Banks. Typically a line of credit is what will provide you with the working capital cash your business needs. If you are purchasing equipment, materials, and other assets, consider financing from the seller (distributor, equipment leasing vendor, or other supplier) and credit cards. For all other working capital needs - payroll and other payments in advance of payment from customers - the line of credit should suffice.

4. Credit cards. Refer to the bank discussion. Use credit cards to purchase office supplies and other materials.

5. Accounts receivable financing or factoring. If you have contracts or purchase orders or proposals from which you create invoices, and hence receivables, then accounts receivable financing may work well for you. As mentioned in previous articles, this can be expensive but is often a great short-term solution. Comparison shop for the best service and rates. Some receivable financing and factoring firms do not finance construction projects due to the reserves/retainers often contractually required.

If you are working on specific government contracts or with a specific government sub-agency, there may be dollars set aside to provide lower interest loans tied to the receivables from the contract. Ask. Investigate. This is a good source of working capital for business.

6. Microloans. If the amount of money you need is low (under $25,000) consider microloans. There are a number of microloan providers in the Atlanta metro area and throughout the state of Georgia. The same applies across the United States.

7. Angel investors. If you have a rapidly expanding business or have a plan for one, an angel may provide the equity funds you need to grow your business. An angel that is actively involved in the business may also serve as a guarantor for a bank line of credit if your personal credit or your business credit rating is too low to qualify for a loan.

8. Joint venture.

9. Strategic investment.

10. Private equity. Business service providers such as construction companies, IT services companies, marketing firms, and business consulting providers (the list goes on) can only attract equity if and when they have a plan to expand regionally or nationally, occupy a strong market niche or have successfully differentiated their company from their competitors.

Private equity funds typically need a 20% or greater expected return and without the larger expansion plans and scope, a construction firm or other business services company will not provide the required returns. In addition, some funds do not like the lack of contractual recurring revenue inherent to the construction industry. You cannot attract equity and raise capital for your ten-person firm. However, if you have the management team, business development acumen, sales strategy, and operational foundation to grow the business to a 100-person or larger enterprise in a few years, private equity funds may be interested.

Construction firms tend to be small, local operations. Therefore, most firms will not qualify for any equity investment. However, if you want to make the leap from a small consulting type shop with historical revenue of $3 Million or less to one with $30 Million or more, you need to first create the vision and goals, then the plan to achieve those goals . If necessary, engage business consultants and coaches who can help you identify the company's and your weak areas and put the things in place that will lay the foundation to help you achieve your goals.

If you only reached $3 Million in all of the last ten years, and now you want to make the jump to $30 Million in five years, you must address the huge credibility gap you are now burdened with. Utilizing consultants and coaches will get you on the path to raise capital sooner. These entities can also help you write a plan that incorporates the necessary changes.

If you have been on the path to larger revenue from the beginning, then you do not have the credibility gap with an equity source. However, you must clearly understand and clearly communicate how you are different and how you will achieve revenues of tens of millions when the vast majority of your peers will never come close. This is not to discourage you but to simply help you understand what the investors' point of view will be.

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