In any metropolitan area, one of the biggest indicators of growth is construction. Phoenix saw 10.7 million square feet of industrial projects this past year, according to the November 2024 Industrial Market Report from CommercialEdge, opening the door for continued growth in the industrial and manufacturing space and more opportunities for construction companies. Heading into 2025, as interest rates have begun to drop, it is expected even more projects will commence.
With so much local activity, finding the right bank to work with can be challenging for construction companies. For starters, the industry experiences quite a bit of variation as revenue is project-based, which can vary from one year to the next. Other variables like weather conditions, the broader economic environment and vacancy and absorption rates also impact construction, all of which are largely outside a contractor’s control. These nuances can make it difficult for banks without experience in banking contractors to provide resources that can aid a company’s working capital management — resources that are critical to construction companies and contractors.
To find the right fit in a bank, business owners should begin by noting the intricacies of the business. The three questions below can help outline the structure and support to consider when reviewing banking relationships.
Question 1. What are the business’s specific banking needs?
Even within the construction world, companies approach business differently. For example, general contractors and subcontractors operate differently.
Typically, general contractors have fewer hard assets, or “collateral,” and fewer financing needs to run their business. In this case, a banking relationship might focus more on setting up accounts receivable solutions like online payments and ACH capabilities.
In the case of subcontractors, who are typically buying tools and equipment while being paid progress payments throughout the project, there may be a need for bank debt and lines of credit to support those costs.
When it comes to securing financing, banks need to understand the timing and consistency of revenue and profit margins from year to year. For example, how much revenue is tied to any one customer? Additionally, providing a backlog, as well as a summary of projects in various stages of negotiation, can provide insight into a company’s future performance. Ultimately, a bank will want to understand how a company has historically performed and how likely that performance will continue.
Question 2. What processes could be simplified?
The right banker can help keep owners updated on new banking industry technologies and systems the company may want to utilize to help maximize cash flow and streamline processes. Starting a business begins with the right working capital capacity, but success often comes down to using the right tools.
One tool construction companies are using to streamline payables is card payment programs, such as Visa Payables Automation (VPA), which allows them to move away from paper checks. This is often a good fit for construction companies, as they have multiple payables to manage. VPA can be used to automate the procure-to-pay process and can enhance reconsolidation through reporting. Setting this up can potentially improve the payables process for both the company and the recipient.
Question 3. Is the business protected from financial risk?
Construction companies are very familiar with the need for risk management tools specific to the industry, but they should also consider how to manage risk when it comes to their bank accounts.
It’s important to understand the company’s payment processes, any fraud risks associated with those payment types, and protections that can be added to attempt to protect against bad actors. For example, for companies that write a lot of checks, tools such as Positive Pay can be utilized to potentially mitigate some of the risk of attempted check fraud.
Preparing for Success
Next, it’s time to identify the best fit. Construction companies want a bank that understands their business and the industry’s nuances. Some questions to ask a bank include:
- What is the bank’s experience in banking contractors?
- How does the bank handle industry cycles?
- Does the bank have any references in the industry?
- How does the bank look at lending? Does the bank lend on progress receivables, require borrowing base reporting, allow borrowings on bonded receivables, etc.?
Those currently sidelined with working capital financing should reevaluate the business needs and complexities and create a game plan alongside the right institution.
Kyle McMillian has worked with UMB Bank for more than 18 years, primarily in commercial lending in Arizona. He specializes in banking both small and large general contractors and trade construction companies.
UMB has been banking the construction industry since its inception in 1913 and recognizes that each client has unique needs.
