Episode 154 | The First Step Most Contractors Miss When Considering Financing

Most contractors start by looking for financing. The best contractors start by understanding their business.

In this episode of The Mobilization Mindset, Scott Peper and Drew Aldridge explain why the first step in any financing strategy has nothing to do with banks, loans, or credit—and everything to do with knowing your numbers. Before choosing a financing solution, contractors need to understand their profitability, cash flow, operational capacity, and growth goals.

They discuss:

• Why financing should support your business strategy—not define it
• The operational metrics every contractor should know before borrowing
• When banks, factoring, asset-based lending, and project-based funding make sense
• How poor financing decisions often begin with poor business visibility
• Why disciplined contractors create more financing options as they grow

Scott and Drew also share real-world examples of contractors who expanded successfully by building strong financial foundations first—and others who made costly financing decisions because they skipped that step.

Check out our blog: 6 Construction Financing Options Every Growing Contractor Should Understand

Learn more: https://mobilizationfunding.com/

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Transcript

SPEAKER_01 0:00

Talk about the best financing solutions for a growing contractor. Your best financing solution is to start at home and really analyze your operational excellence and all the different things you need to understand in order to run and grow your business responsibly. That's the best financing solution right there.

SPEAKER_00 0:16

Get yourself access to the information you need to make great decisions. Welcome everybody to the next episode of the Mobilization Mindset. My name is Scott Pieper, CEO and founder of Mobilization Funding. And today, Drew and I are going to be talking about financing for construction contractors. You can find all of this information, whether you hear it here or if you want to see us live, you can also see it on the YouTube channel. Drew, welcome.

SPEAKER_01 0:46

Glad to be here. Happy post-fourth. Your fourth was pretty awesome.

SPEAKER_00 0:50

Is uh the Monday after 4th of July that we're down at the beach? We were down at the beach. Yeah. It was fun. It was hot. Nice. Lots of kids and all their friends.

SPEAKER_01 0:59

Back in the swing of things. Monday. Back in the swing of it. You talk about financing solutions. The first thing you need to do is say, all right, am I doing profitable work? Am I bidding correctly? Do I know my unit economics? Do I know my capital strategy going forward? Right? Do I need to reinvest into my business to grow X amount? It all starts with a goal and a mission. You could be a $5 million concrete guy in Texas and say, by the end of next year, I want to be a $15 million concrete contractor in Texas. That takes so many different moving parts. And the first thing you got to do, forget the financing solutions for a minute, right? What do I do need to do internally, operationally, and from a reinvestment standpoint? What tools and people do I need to put in place actually to make it to 15? Only at that point you can identify where your gaps are. Like, okay, for example, I'm not as profitable on these jobs as I am on these jobs. But these jobs over here, I do a lot more of those and they and they have better payment terms.

SPEAKER_00 2:02

Yeah.

SPEAKER_01 2:02

Right? These jobs over here are larger or maybe uh few and far between, but they're much more profitable, but might get paid a little bit slower on those. So you got to kind of know where you are within your operational capacity.

SPEAKER_00 2:14

Yeah, and here's why that's important. I'm gonna tell us a real story.

SPEAKER_01 2:18

Yeah.

SPEAKER_00 2:19

So someone B and you both know well. Um a customer of ours at one point had a great business. I use the word had, because we're talking about financing. And what you just made note of, which is really key, is you have to know your numbers and you have to know what your costs are and you have to know what your systems are in place to do this and why. And here's why. This particular company Drew and I are talking about, for every dollar of revenue they generated, it cost them one dollar and 75 cents to earn that dollar. That is a completely negative scenario. Okay. Now, someone would say, Well, how the heck can you spend a dollar 75 and only get a dollar back? Easy. One, you have no idea what your labor cost is, and you think it's X, but it's really 1.75 of X. You are giving and spending money on big capital improvements like internal systems that don't work, technology that doesn't work, you're being sold every piece of software and saying yes to it because you think it makes you feel good, but you don't know how to use it, you don't know how to implement it. Then on top of that, because you don't realize that every dollar you earn costs you a dollar 75, you you're just short on cash, but you're growing so fast that you need capital to grow. So instead of watching a video like this, putting things in place and taking your time and finding the right capital source, you take the easiest one and to the tune of a million dollars, and then you spend that million dollars in a three-week period on all the wrong things. You generate only $300,000 of revenue from that million dollars. At the same time, the million dollars you generated came from a merchant cash advance, which has cost you a million five to pay back. So you now have gener you now have created a million five in cost and you've only earned three hundred thousand dollars in revenue. You've now put yourself in the hole, a million two or a hundred thousand dollars a month.

SPEAKER_01 4:18

All right, let's look at the sequence of events there. Right? You start a business, you grow a business, all of a sudden you've grown it so fast, you actually don't know your numbers, you don't know what the right hand's doing, you don't know what the left hand's doing. So then you make financing decisions without understanding exactly what you need.

SPEAKER_00 4:33

And can I stop you there for a second, too? All because you're too proud to just know what you don't know. Because just starting a business and making these mistakes is perfectly fine. Every business owner is gonna make these mistakes. And part of the reason why it takes a while to build your business is because you're gonna make mistakes. But if you make compounding mistakes on top of mistakes, you now create a point where you run yourself out of business. And that's exactly what's gone on here.

SPEAKER_01 4:59

An alternative story is that business owner who grows to 20 million bucks. Let's take the same story, but an alternative.

SPEAKER_00 5:07

This is another customer. I know where you're gonna say.

SPEAKER_01 5:14

This guy has been bootstrapping his company. Essentially, what that means is taking all the cash that he generates and puts it right back into the company to help fuel growth.

SPEAKER_00 5:24

Makes mistakes, absorb losses.

SPEAKER_01 5:26

He made some mistakes. All kinds of things. He did he bid wrong on like two projects last year. We he he lost a little bit of money. But he bid right and executed right on like 22 projects where he made up for that. He learned from those mistakes, right? So then he hits $20 million in revenue and says, I want to be a $40 million company. He took inventory the last three years he's been operating, took inventory of those mistakes, said, I'm never gonna make those mistakes again. He understood his unit economics down, unit meaning his profitability per job for the material that he bills for, for the labor that he bills for, how much labor he needs on each job, what is the schedule of that labor. He ended up taking an entire inventory of his entire company, brought in an outsourced, you know, controller CFO to manage all that for him, right? And then he's in a position where he has options. He knows what he wants to do. He consults people close to him, he goes out and says, Hey, is mobilization funding right from there? Oh, by the way, am I in a position to go get a bank loan? Yeah, you are in a position to go get a bank loan. Is factoring make sense for him? Only kind of on these projects. I don't know if I want to factor factoring all of my receivables, maybe a factor that just so he started educating on himself what kind of financing solutions would help him get to that 40 million bucks. All the while he created a scenario where he built the balance sheet, he built profitability where he would have options.

SPEAKER_00 6:51

Right. And his discipline to keep the cash that he did earn in the business along the way helped him easily recover quickly from mistakes. It helped him have cash available to execute new work, and it gave him a balance sheet to where all of these options, bank options, factoring options, ABL lines of credit options, and mobilization funding are all options to him. And most importantly, he said no to the merchant cash advances all along the way, who would have given him money at any given point. And he did that because he realized that his main goal was to build a good business, one that could provide for him and his family, his deliver his product and service to his customers, and take care of his employees. And the only way he could do that was by making good decisions over a period of time. And now effectively he has the entire availability of options. And so the reason factoring didn't work for him is because it doesn't it didn't solve the problem for him of as he grows, he's gonna need this money to execute. His payment terms are very similar in construction. Cost take, I mean, takes him 30 to 45 days to get paid, takes 30 days to bill. He just the factoring alone wasn't gonna work well for him. He didn't have a big enough AR backlog that he could use as free cash flow where he could just pay, take in all that money. Plus, he also already had a senior line of credit, which there's no point in paying off that line of credit because he had a good $3 million line of credit he could use across his business. So that eliminated factoring and uh ABL solutions because they the his bank wasn't gonna subordinate the AR positions. So that left mobilization funding or merchant cash advances, which quite frankly aren't even a then they shouldn't even be in the same sentence, let alone the same decision trade.

SPEAKER_01 8:38

And he didn't even need the advance rates, the 80%, 90% that an ABL or a factor is gonna most in most cases want to do because his gross margins were so favorable. I mean, his margins were very favorable. So he did his he had larger margins than than what an ABL or factor typically likes to, you know, they like to advance more. And he didn't want to borrow that much.

SPEAKER_00 8:58

And by larger, like they were what?

SPEAKER_01 9:01

They were like 32 to 35 percent, somewhere, you know. Yeah.

SPEAKER_00 9:04

And even for a construction company that's in the 22 to 25 percent, it still works, provided that you're accomp finishing your jobs. You don't have one big job, but you have many jobs that you're cross across the bigger scope. And you're um even if your retainage is at 10%, it could still it can still work.

SPEAKER_01 9:23

Yeah. Yeah, but he had a he also had an overhead, like a uh SGA or overhead base where he didn't need to borrow all this money to support that, right? It was just he wanted to create a machine. That's why he moved with us.

SPEAKER_00 9:35

Yeah, and been in business for, you know, seven, eight years. Yeah, seven or eight years, yeah. Yeah, and doing well. So there's lots of options out there, but I think the takeaway message is know what systems are in place in your business first so that you know what your, as Drew qu very well said, unit economics are. When you know what your unit economics are, you know where you can pour money into the business that will deliver value for you, as opposed to pouring money into the business that will only cost you more money every dollar of revenue you produce. And I know that sounds insane to think that you could gain a dollar of revenue, but it costs you a dollar seventy-five to get. But we see stuff like that all the time. That's a big example of a dollar seventy-five. Usually it's a dollar ten, a dollar twenty, something that you can kind of recover from and pay attention to, but it doesn't feel it so much. But when you're not paying attention to your costs over a long period of time and you grow too fast, that's how you can get to $1.75 for every dollar of revenue earn. And then quickly you earn yourself out.

SPEAKER_01 10:37

Yeah. And and you and Scott, you hit the nail on the head. I mean, Scott a minute ago said, you got to know your unit economics, you got to know your growth story, you got to know your business. That's the story you need to tell those financing options out there. That's the story you need to communicate to them and believe it too. And it's got to show in the numbers as well. That's why the question was raised, you know, talk about the best financing solutions for a growing contractor. Your best financing solution is to start at home and really analyze your operational excellence and and all the different things you need to understand in order to run and grow your business responsibly. That's the best financing solution right there.

SPEAKER_00 11:15

Get yourself access to the information you need to make great decisions. If you don't have that information right now or don't know where to get it, find the right people. They'll create it for you.

SPEAKER_01 11:23

And then or reach out to us, and we know tons of people in the space that can help.

SPEAKER_00 11:27

And then you can have all the financing options available to you to execute the best way possible and stay in business. That's it. I hope this video helped you all. You can see us live on our website at mobilizationfunding.com, also on our YouTube channel if you're listening to this just on the podcast and he and audio platforms. In the meantime, Drew and I'll catch you next week. Have a great week and may God bless you.