Michael Beaver: To Lend or Not to Lend? That is the Construction Sector Question – ABL Advisor
Michael Beaver wrote an article for ABL Advisor titled “To Lend or Not to Lend? That is the Construction Sector Question.”
When seeking to invest in a company, most lenders, banks and investors look at EBITDA and growth plans to decide if they’ll fund companies in a particular industry. The construction industry is different as EBITDA provides only a small part of the overall view into a construction company’s financial health. For a more accurate and comprehensive picture, more in-depth questions should be asked. Among them:
- Can the company fund its working capital needs?
- Is additional funding necessary to stimulate growth and widen capabilities?
- What is the company’s historical performance?
- How stable and profitable is the company’s backlog?
Determining the answers to these questions is a much stronger indicator of future performance and the likelihood of loan repayment.
Reliable indicators for lenders can be found on the balance sheet, including the overall health of the company, work-in-process schedule (WIP), what transactions are taking place, and why additional capital is being pursued. The company’s WIP schedule, which isn’t a traditional part of a financial statement, provides a look behind the veil and can be an important part of the financial package provided by a contractor.
It is not unusual to hear contractors say, “Business is great. We’ve sold more work and want to add significantly to our workforce.” What they often seem to overlook is the limited amount of working capital available from lenders or investors to support more work. Such capital can be hard to find. In fact, most working capital providers do not lend to the construction industry because of the nature of accounts receivable activity (i.e. progress billings).