Tired of fronting job costs? A smarter subcontractor cash strategy

Hello, everyone. Welcome to another episode of the cost code show presented by Noify. This is a podcast where we focus on helping trade contractors run and grow their businesses. Today, I'm excited to be joined by Robbie Reynolds, VP of corporate development at Build. Robbie has a ton of experience in the financing and cash flow management side of construction, and he's gonna share that with with us today. How are doing, Robbie? Great, Ryan. Thanks for having me. I've been a big fan of NoFi and and our partnership and, as well as the show. So excited to be here with you. Awesome, man. So for folks who don't know you yet, maybe you can talk a little bit about your background and how you got into construction and all that good stuff. Absolutely. I've been in commercial lending in one form or another my entire career. It started after college. I got into commercial banking, the private equity for a while, and then moved into equipment financing and then ultimately construction lending with Build. So my entire experience has been b to b lending and now with the emphasis on the working capital side of the equation. And then a little bit about Build. Build is a provider of working capital to the commercial construction industry. We focus specifically on this industry and specifically for the trades. We've got a seat suite of products that do solve for that. So, yeah, excited to talk about talk more about it here today. Awesome. So let's talk let's start with what I might call the elephant in the room. Let's walk through walk us through the situation subcontractors face as far as funding projects or being, quote, unquote, the bank for for projects. Yep. I think it really starts from how the industry is structured and the cash conversion cycle for subcontractor. When the cash conversion cycle the time from which you're outlaying cash to which you're actually recouping that in terms of getting paid from your customer. You know, there's different resources out there, but it can be anywhere from sixty to eighty, ninety days. And if you just start with that and stack it up against other industries, it's already at the top of the list. It's one of the longest cash conversion cycles out there. Secondly, construction is capital intensive, specifically for the trades. Something I always like to say is who's actually financing a construction project? Well, to the normal person you ask on the street, they'd probably say all the banks are financing. And I'd argue differently. The subs are financing the construction project, and they're being reimbursed, for work already completed by the owner and GC. So the subs are at the front of it. And there's a long cash conversion cycle capital intensive. They have to figure out a way to finance this to get their projects off the ground. So that's really what creates the problem. And then you add on top of that, it's a long sales it's a long conversion cycle. Excuse me. However, it's also unpredictable. So some projects you have thirty day terms, but the owner drags their feet, and that thirty day term ends up being a forty, fifty day payment. Other projects you sign up for might be a longer sixty, ninety day terms. Maybe on a public project that we're going in, it's gonna take longer to get paid. But even when you know what the payment terms are, there's no guarantee of when that's gonna come. And and, additionally, there's one weak link in the entire payment chain, if you will, that could slow the whole thing down. So you get your pay app in on time. GC reviews it, but the owner drags their feet. Okay. That still impacts you. And so that's something you have to manage through. Excellent. That's super helpful. So how does that kinda, like, long cash conversion cycle end up, you know, impacting subcontractors or maybe influencing the way they run their businesses? Yeah. To start with, it's something that the trades need to plan for. And there's, like, different ways that you can go about that, but it's critically important that you solve this equation and at least have a plan of attack so you can, one, weather storms, but two, grow your business. I think there's a lot out there who know what I'm talking about in their gut. There's times that they were low on cash, trouble making payroll, whatever it might be. And but they don't necessarily know how to bridge that to how much cash do I need. And so you tend to be pretty conservative with how much cash you wanna keep or maybe how you're choosing to grow your business to make sure you have enough cash. So I'd always say the number one thing is really about planning. And what I mean by planning is where is your business today and where are you trying to go? Because you need to back into how much cash does my business really need. So having a firm grasp on that in terms of where you wanna be this year, next year, three years from now, and working backwards is the first step, but having clear concrete goals of how you're gonna get there. And then once you have that in place and by the way, not everyone has necessarily the skill set. So I wanna just pause and say, if you don't feel like you know how to come up with that yourself, there's plenty of advisers, consultants out there who can help you with this. It could be your CPA. If you've got a controller CFO internally that might have the skill to do this, Build, we help customers with this all the time. Your banker might be able to help you out as well as third party consultants who would do this for a fee. I encourage you if you don't feel like you have the skills to do it, then to find someone to help you do this because it's a road map that you're creating that you're gonna continue to use year after year. So it's worth doing the right way. So the first step I'll be talking about, yeah, is really solving for what that is. If I'm if I'm a ten million dollar contractor today and over the next two years, I wanna be fifteen million, how much cash is that gonna take? What's the growth rate that I'm achieving I'm shooting for, and how quickly I wanna get there? And then the second piece is really breaking down the capital stack. And what do I mean by the capital stack? That's all of the different sources of cash. And the first step, we say, okay. In order to get to that fifteen million dollar mark, maybe I have. I'm just gonna make up numbers completely. These are probably not gonna tie in, but we're it's just an example. I wanna get to fifteen million over the next two years. And I know that in order to get from ten to fifteen, it's gonna require that I have three million dollars in liquidity available to me in order to get there. And so now that you know that number of three million, you're looking at your capital stack and say, okay. How much do I already have accounted for in this equation? And something that you are also solving for is what's my peak cash need. What do I mean by that? It's great to solve for what you need on any given day, but what you also have to be cognizant of is, okay. What's the biggest this cash gap could be? Assuming that we're hitting some of our growth trajectories and maybe we get some slower payments than expected, what's that relative range and be able to solve to know how you accomplish that as well. So you've got our cash needs, what the peak cash need would be, and we're backing into it. So the first one, obviously, is your cash. You should have cash, and you that's easy to figure out what it is. But you also can't have you need to have cash on the balance sheet. So you can't think of that as, oh, I can just deploy anytime. You need that as some of your buffer as well. You've got your lines of credit cards, supplier terms. There's other solutions such as build. And then something that's coming around, I would say, is really gaining momentum in the industry right now are GCs offering early pay programs. Some of your GCs might do that. It's just another lever you could pull to calculate and arrive at the amount of cash you need. So then you're gonna go through and figure out how much cash I have from each of these sources or availability, and you start backing into a plan of how do I get to that three million dollars. If I go through that and I've determined that I've only arrived at two million dollars in cash, then we need to solve for the delta, or you gotta rethink your growth plans, is really what the end of the day is. And you don't have to rethink your growth plans if you have the right consultant and the right strategy to go acquire that working capital that you would need. And then it's really going through each of those and seeing how I can access additional liquidity, to make sure I have sufficient cash. Nice. So as far as the capital stack is concerned, are there certain use cases that are more, like, appropriate for each of those different kind of capital sources? Like, kinda help maybe help some help a subcontractor who maybe isn't super familiar with all all those available options. Like, where would you wanna deploy credit cards versus a line of credit versus, you know, the cash that you might have in the bank? Yeah. That's a good question. So one, I would say, think about in terms of flexibility, and you want to, make sure you retain the flexibility where you need it. So cash and line of credit, those are the most flexible because you can draw on them to use for anything you want. And so you need to leave some of that aside. And then you would go to places like credit cards, for example. They can be good to use, but just you need to know what the cost is gonna be. And also know that it's not common you'll be able to solve that full need. That's good for your recurring business related expenses that you wanna defer a bit, but going and purchasing half a million dollars in materials on a credit card for most people is not feasible. So that's why you need to where you need to look at other sources. But, generally, you wanna reserve your most flexible options for when you need it and then go strategically deploy those other ones. So are you strategically using your supplier terms, negotiated the right terms? This is where also Bill can step in. We've got an offering for material financing where you can actually extend those those credit terms with suppliers from the thirty days to upwards of a hundred and twenty days, or a pay app advance where we could speed up the payment on those pay applications to a couple days after it's approved rather than the thirty to forty days. So you wanna go through that plan and then deploy it using those more difficult ones strategically and reserving the easier to use or access options for when you need it. Cool. Perfect. I think that's that's very, very helpful. So are there any kind of expenses that you would recommend, like, not funding with any of these kind of kind of tools? Like, just kinda trying to maybe help folks head off any potential mistakes they might make. Yeah. It's a good question. I would the biggest thing I've seen is just make sure that you are, and this is a little bit outside of the working capital conversation, but, like, you're using the right products, the right financing tools for the right use cases. Right? So I'll give an example of if you need a piece of equipment for your business, you should be thinking about, should I go pay cash for that, or should I consider maybe, like, an equipment financing option so I can preserve my cash for my working capital needs. Likewise, the credit cards should really be used for those ongoing business expenses, not those big project related purchases. And a line of credit can be pretty flexible because you can use it for anything in between. Nice. One other thing I'm I'm kinda curious about is, you know, there's a sort of a cost associated with some of these kinda capital sources as far as, you know, associated with it and things like that. How could a subcontractor go about kind of projecting those costs and baking that kind of cost of capital into their plans? So what you're getting at is a great point. And it's once you figured out your cash needs, you've understood your capital stack, and you have a plan in place for what percentage of my liquidity am I gonna draw from each of these options in my capital stack, you can then figure out what is my cost of capital. Right? What is my financing cost? And you should know that because this is a tight margin business. And if you're not accounting for the cost of your capital in your bids, then you're doing yourself a disturbance. There is a direct cost for materials. There's a direct cost for labor. There's also direct cost for money. Most most contractors we speak with do not think about including their financing cost within their bid. But the ones who grow and grow profitably know that this is a key element of it if they're gonna be using financing to to achieve that growth. So, again, this is something we highly recommend after going through that capital stack exercise is taking that into the bidding process and accounting for your cost of capital. If I know I'm gonna use a certain type of financing on this project, then let's make sure we include that to where we are protecting our margins at all costs. Perfect. Maybe along those lines, you know, there's a lot of options as far, if you take credit cards, for example, like, there's, you know, quite quite a lot of options available. Do you have any kind of, like, rules of thumb you might be able to provide as far as, like, knowing this is a great this is a good lender to work with or this is a good, you know, source of capital for for this Yeah. Category, if that makes sense. One, I would say take a look at the lender and their area of expertise. You know, I'm gonna stick credit cards to the side here because I'm just not a proponent of that being a core part of your financing strategy. They're just not designed to be. But if you talk about working with a lender who's someone who's gonna support your business and provide you working capital, whether that's a a line of credit, maybe it's a a factoring company, maybe it's a build type, maybe it's someone else. But what do they specialize in? Because lenders will generally have an area of focus, and making sure that they understand construction and they have other construction clients is really important because that's gonna reflect how they view you, the types of terms and covenants that they put in place, and how difficult it is gonna be to obtain financing in the good times and then how understanding they're gonna be in the difficult times. Right? Someone who doesn't understand construction, which you can get on a tight spot with, if let's say you've gotten a line of credit who's not from a bank, who's not big into construction, and construction starts slowing down, they get spooked, and all of a sudden, your line of credit goes away. So I'd say the lender's expertise. And then two, you do need multiple options. Right? You can't just rely on one. You need to set up these options ahead of time, and it's before you need it. The best time to ask for a loan is when you don't need the loan. So you should always be thinking about in the good times, I should be asking for credit now. So it's already set up when you need it. Because when you come to a lender and you're desperate and you're running out of cash, you need a loan now, it's much more difficult to get it. Yeah. That makes a ton of sense. Have you seen situations, just curious, where, like, you know, having having these tools in place can help, subcontractor win business or or maybe appear more, like, trustworthy to a GC, like, knowing you have x, you know, hundred thousand doll you know, hundred thousand dollars of of credit available to you, that kind of thing. Yeah. It absolutely comes into play. One, it impacts your prequalification process with GCs. They are absolutely looking at how much liquidity you have. Are they looking at cash on hand, also unfunded commitments? Same with your bonding. Alright? When you need to get bonding, one of the biggest things they look at in their underwriting is liquidity and unfunded commitment. So having those in place and improving that you can weather storms is gonna give you a leg up. Right? Especially in a competitive competitive process where you're up against a handful of other trades for a job. Your ability to, one, you have your track record, but two, to financially show them how strong you are makes a big difference knowing that you're gonna you're gonna execute the way you say you are. Perfect. Is there any kind of rule of thumb you might have for, like, reevaluating kind of your capital stack? Like, is it something you might wanna do, like, every six months, every year, that kind of thing? I'd say at least annually, you should be looking at it. To expand on that with whoever your finance team might be, if you have a CFO controller or using a consultant or just you should be keeping a tabs on what that access is, how much you have drawn down at least monthly. But you should be then reassessing it annually of, okay. Where am I going this upcoming year? I've got these sources of liquidity. Is it gonna get me to where I wanna go, and do I need to reassess? Perfect. That makes a ton of sense. I wanted to now maybe jump just into, like, the more specific component of the capital stack, which was the early pay programs Yeah. You talked about. Could you maybe explain what those are in a little bit more detail, where they fit in the capital stack, like, when they're a good idea to use, when you might not need them, that kind of thing? Yep. No. It's so we are intimately aware of this. We actually work with GCs to help them facilitate early pay programs, and we've seen a lot more GCs offering this. Effectively, what that is, it's a programmatic way for subs to get paid early on their project with that GC. Typically, how it would work is you would follow the same submission, requirements that you do today. Let's say you're submitting by the twenty fifth. You provided all your compliance documents, and the GC is approving internally. And then you would able would be able to get paid by, we'll call it, the first and the third of the month. So, generally, that equates to thirty, thirty five days early, and they're pretty flexible. You can either take this on one pay application or sign up for an entire project. But it's a really great way to to improve the liquidity in your business, and it does not impact your other financing sources. Technically, it's not borrowing, so it would not impact your line of credit or how you work with suppliers or even build. It's just another liquidity lever. And so I know there's a lot of listeners on the show here. I would encourage you to ask your GCs, if this is something they offer or if they've considered it for two two reasons. One, they might and you just might not be aware of it. And two, the more they hear that from y'all, the more likely they are to go engage with the program and start offering one. And it's really a win win for the industry. So I would highly encourage the group here to ask your VCs about that and also feel free to reach out to us. We could help you formulate that conversation as well. Cool. I think it's I think at least it's a similar type of product along similar lines, but we have a lot of listeners and and nullifies a lot of customers that are, you know, doing AIA projects involving AIA pay applications. And I know that you've talked in the past about pay app advances. Could you maybe do the same thing where you kinda explain you you might probably it's obvious a little bit obvious what they are, but, like, maybe explain what they are and where those would fit in into the equation and any kind of pros or cons of those? Yeah. A hundred percent. So the payoff advance is similar to that early pay, but it's not offered through the GC. You would just work with Bill directly. So when you have an approved but unpaid invoice, you could come to bill, then we would advance you up to a hundred percent of that pay application, as soon as it's approved. And once you get paid from the GC, you turn around and pay bill back. So it's just another tool that you can use to speed up the receivables, improve your cash and your cash flow, and it's completely flexible in terms of it's you can use it as you need it. Right? There's no requirement that you have to go use it on an entire project or x percent of your business. It's a very flexible tool that allows you to control your cash flow pretty easily. So that we generally would encourage for general g and a expenses, labor cost. If you have a big project coming up, you need to free up some cash flow. All those would be great use cases. It could be a part of the planning process. Right? I need to use a product like that on twenty percent of my projects in order to meet my cash flow goals the next year. I see. I like the idea of integrating it into the into the kind of the planning process upfront. As far as all of this all of the kind of financing stuff is concerned, what's kinda, like, the biggest mistake that you see subcontractors make? Like, what are some kind of things they can do to prevent that or make sure this stuff kinda works out the way they plan that it's gonna work out? Assuming it's all gonna go as expected. Right? I think it's obvious, but are you planning for the contingencies, the downside, and knowing what the relative range of cash needs is gonna be? Not just the this is my best my my base case band here of what I'm gonna need and just planning for that. So maybe two part answer, making sure you're actually planning for it, and two, knowing what the downside scenario is and that you're able to weather that storm. Cool. Perfect. I like that. I'm always planning. I was planning for the worst. Hope for the best, plan for the worst. Right? There you go. So we're getting kinda closer to the close to the end of the convo. So one last question from me before I give you a chance to talk a little bit more about Build and what you all do is, you know, we we like this podcast to be, like, really action actionable. So if there was, like, a subcontractor listening today that was starting to think, you know, about cap their capital needs and planning and things like that, like, what would be kind of the first thing they could do, you know, next week to to get the ball rolling and and immediately start to kinda integrate some of this stuff into their business plan and and their execution and things like that? Great question. I would say the most immediate things would be looking at my backlog, my pipeline of what I have coming and taking stock of my liquidity today. And if even if it's just a gut feel of, do I have enough? Go take the action of starting that relationship with a capital provider because these things don't happen overnight. So just get that ball rolling. Pick up the phone. We'd be happy. And, also, the build team does do this. We can help you come up with that assessment to determine how much cash you're gonna need. I would say so if there's one thing, I'd say do the assessment. Do your own internal assessment of how much cash I need, and then you can put together an action plan from there, and we'd be happy to help for those who need it. Nice. So, yeah, maybe you can just share a little bit more about build for the audience, what y'all do, and and where they can learn more about you guys and take and, you know, reach out if they would like to. Yeah. Absolutely. So we talked a little bit about this. We are the nation's largest working capital provider that focuses specifically on commercial subs. We've got a suite of working capital products that are very flexible to use, all designed around improving cash flow and enabling subs to grow their business. That's all we do every single day. We are intimately aware of this industry, the needs unique needs of construction, and are here to support it. So that's what we do every day. To get in touch, I'd say feel free. You can shoot me an email. It's r o b b I e at Build dot com, or go to our website, and there's a couple of places that you can reach out there. It's w w w dot b I l l d dot com. That'd be the two easiest ways to get in touch, and someone will follow-up with you shortly. Nice. And, Robbie and the bill team have been kind enough to provide a working capital toolkit, which is like a downloadable guide that kinda walks through a lot of the different topics that we covered today. I know it's it can be kind of a lot to take in just listening or watching us. So good to have a hard copy you can reference. We'll link that in the show notes for y'all to reference. I think that about wraps it up. So, Robbie, thanks for, you know, taking the time to talk to us and the CostCoat show audience. Definitely check out Build if y'all are interested. And if you need help managing your construction projects or your construction financials, please check out Knowify at w w w dot knowify dot com. We'll be back with another episode of the Cost Code Show soon. Thank you.