Builders, like other small business owners, are having trouble financing their businesses. Maybe this isn’t new, but the ways of doing this have changed from how they were a few years ago.
Banks don’t lend as much, and when they lend, there are more hoops. Builders don’t need as much as they used to, because there isn’t as much business, and in most places, land and everything else costs less. At the same time, there will be more business opportunities for builders in the years to come.
Investors are still around, ready to provide money (at least they say that). Investors still want a big part of the profits and they take a long time to decide.
We need to get more creative in financing our building business. We had a webinar on that topic, and people liked it so much that Chuck Shinn, Ron Robichaud and I are going to do a second part July 9th. Here are a few of the ideas we are discussing.
Stick to the fundamentals. Know what you need the money for and match that to the requirements of your source of money. For example, don’t finance deposits on land with trade payables (I’ve done that; life is better if you don’t).
Have a real need for the money—like a home that you have sold but need to build. Really examine why you need to finance spec homes, finished lots or land. Most builders make less or lose more on spec homes. Oh, and this thing called “other working capital”: most of the time that’s what we call paying for us, our people and our stuff when our business is losing money. If that’s for a few weeks, before the month-end closing rush, and if it’s for a little bit, maybe that’s all right. Otherwise, cut your expenses to match your revenues; even better, make your expenses less.
In finance, this kind of happiness is called “profitability,” so be profitable. No one (in their right mind) is going to lend to or invest in an unhappy business, i.e., one that is unprofitable. If you can’t get it profitable, shut it down, liquidate, take a break, do something else, deal with the consequences—and be happy!
By the way, some people aren’t in their right mind—by now you may be considering me one of them. There are lots of people with “vision” who are losing money (generally not their own) but who have a “great opportunity.” While the supply of these “visionaries” generally exceeds the supply of “visionary-lenders-or-investors-willing-to-part-with-their-money,” the world always has some of the latter. I get many requests to help finance these “great opportunities,” including those that are “once-in-a-lifetime” or “for the good of our community [nation],” sometimes from elected visionaries. I do not know how to be creative in this way; my mind keeps getting stuck on “stupid.”
It seems so obvious that I don’t need to say it: be profitable, have a clear need for financing, and have a good story. Unfortunately, most businesspeople aren’t doing that, so to lenders and investors, those who have all three of these elements are unusually creative. They create profits and good in society, not losses and pain.
Once you’re profitable and have a real need for money, tell your existing and prospective financing sources what they want to know, not what you want them to hear. Find out their requirements. If they fit yours, be persistent. Communicate regularly and honestly. Tell them the good and the bad—and what you’re doing about it. Plan on several conversations over time.
People still like to invest in real estate (I heard that—lenders are people, too, you know). You can see it, touch it, drive by it. It doesn’t just disappear (usually). It feels good inside to be part of improving a community—better than a shiny metal or a brokerage statement. Even lenders and regulators like it, although it doesn’t appear to be that way now; they just don’t like too much of it, or when it isn’t selling or producing income.
The most creative source of financing your business comes from—surprise—those who have a vested interest in your business! Your customers—help them get the construction-permanent loan. Your return on assets and investment will skyrocket! So what—a little more administrative hassle, you have to have a solid walk-through and warranty process,
you have to treat your customers well, maybe the last payment is a little slower or a little less.
Next, have your trade partners help out. Even 5-25% of their contract per house will be a big help. For those trades in the last 30-60 days of the construction schedule, it isn’t much of a problem. Plan the payment schedule out with them, keep them informed of potential delays, and PAY them when the house closes. If you make your construction schedule short enough, you could finance at least 50% of your home construction needs this way.
The last most creative source may be the new folks. The peer-to-peer lending sources through the Internet, and the friends, family and business acquaintances that you, your employees, your trades and your customers have. They want a fair return (maybe 5-25%), but they mainly want the security that comes from regular performance (that means repayment) and information.
We think your most creative financing will be a combination of your traditional lending and investing sources, your customers, your trades, and these new sources. The blend will be much more likely to produce substantial profits with lower risk and capital required on your part. We have a great Excel tool that can help you evaluate various combinations.
To do this, you must have very clear goals and objectives for your business and financing. When you have that, it is very simple to evaluate, then seek, the right mix of financing and each person who can provide it. If you need help on establishing these goals, or putting a money acquisition plan in place, let us know.
Jim Weigel consults on management, operations, finance, quality and valuation issues. For more information, visit www.shinnconsulting.com.Copyright © 2005-2010 Builder Partnerships
