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    Top Reasons Why Contractors Have A Hard Time Loaning From The Bank

    Posted by Randal DeHart on Fri, Oct 11, 2019

    Contractors want money; banks want to lend money, what's the problem?
    Think of all the times:
    • You loaned money to a friend or relative
    • Provided labor and material for somebody's home or business without a deposit check
    • Did change order work that you never got paid for doing and never will
    • Gave employees an advance on their paycheck that you never got paid back

    Multiply that by 100,000, and you will begin to understand why banks seem so tight-fisted about loaning money.

    Online banking against tablet pc on desk

    Banks stay in business by loaning money and earning interest. They work hard to find people and companies that have good credit so they can lend money and get paid back in a timely fashion, with all of the interest due to them. Do your best to avoid raising any red flags:
    • Your Profit & Loss and Balance Sheet Reports do not conform to financial industry standards
    • The financials tell the banker your bookkeeper doesn't understand Construction Accounting
    • The preparer's signature on the annual tax returns are not from a qualified tax specialist
    • You have no access to a construction accountant, not even for quarterly check-ups
    • You don't have a formal documented Business Plan with a budget and projections

    If you find you have already raised some or all of these red flags, no worries, we can help you fix most of them.

    The Risk Management Association (RMA)

    In 1914, The Robert Morris Club (RMA) was formed to help businesses and bankers exchange credit information. It was named after Robert Morris, who was a signer of the Declaration of Independence and was believed to be the primary financier of the Revolutionary War.

    The RMA developed several tools, among them was a system of Ratios that we use today to study financial statements of all companies in all industries.

    The banking and lending industry has enormous databases and artificial intelligence software from places like The Risk Management Association that allows them to separate the excellent contractor risks from the bad ones. It generates recommendations based on complex algorithms much more complicated than any gambling casino and with a much higher payoff.

    One of the keys to getting a banker, lender, or bonding company to consider your construction company for financing is the way your financial statements are presented. In particular, your construction company Profit & Loss and Balance Sheet.

    A banker, lender, or bonding agent logs into their RMA account and fills out electronic forms, answers questions about your construction company, and inputs specific numbers in specific blanks that are taken directly from your construction company Profit & Loss and Balance Sheet. Any construction accountant worth his or her salt knows exactly how to set up QuickBooks correctly for this process to take place. 

    If a contractor gives their banker, lender, or bonding agent a set of financial reports that do not conform to the RMA requirements, they may or may not try to extrapolate the numbers need using Excel or some other program.

    In most cases, they are very polite and thank you for "applying" before giving you the "We will let you know as soon as we know anything" speech. I know this because I have heard it from many bankers, lenders, and bonding agents who are frustrated because they know you are a good client and they know you are a person of integrity that can be trusted to pay the loan back, on time, with all of the interest.

    The RMA and other reports show where your contracting company stands concerning other contracting companies serving similar geographic and demographic markets.

    Each major category, Sales, Cost of Goods Sold, Overhead, Other Expenses, and Other Income, are rated on a scale of top 25%, middle 50%, and bottom 25%.

    Ideally, all of the numbers on your Profit & Loss and Balance Sheet falls somewhere in the middle 50%. Whenever a contractor "forgets" to declare all of their income or "overstate their expenses," it will show up here as a red flag.

    Finally, a Z-Score is compiled, which is a formula for predicting bankruptcy. Edward I. Altman published it in 1968. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Although not 100% accurate, it is a useful tool, similar to a tape measure, not 100% accurate yet still useful.

    This is why sometimes a contractor with excellent credit cannot get a loan or line of credit, and yet another contractor with only good credit can get financing.

    And finally, here are the top 10 Reasons why construction company owners might have a hard time securing bank loans:

    1. Current Ratio

    A ratio of cash on hand to accounts payable of less than 1:1. Ideally, this ratio should be 2:1 or 2.5:1.

    2. Bill Paying History

    Poor payment records, judgments, liens, bankruptcy for the firm, or principals on credit agency reports.

    3. Unpaid Taxes

    Make sure your payroll taxes, income taxes, sales taxes are paid, and you have cash reserves in a separate bank account.

    4.License Issues

    Unlicensed contractors and those with expired licenses are a huge red flag! Don't do this!

    5. Bonding Issues

    Contractors who can't get bonded or if your bonding capacity has been cut or your current bonding company refuses to renew it figure out why and get it resolved quickly.

    6. Financial Statements

    Profit & Loss and Balance Sheet - not current, formatted wrong or worse yet you feel the need to explain them.

    7. Job Status Reports

    List of current jobs you are working on with a breakdown of how much you have in job deposits vs. how much you have spent. In other words, are you in competition with the bank by lending your customers and clients money in the form of Labor, Material, and Subcontractors which is precisely what happens when a contractor does not keep getting draw checks against work that has been done and has at least a 10% residual.

    8. Customers Vs. Clients

    Everybody is your customer, which means you have no clients. 

    Bankers and lenders may ask you to describe the people you work for and if you start the conversation talking about your Customers they will presume you are one of those contractors stuck in your "Do-Gooder Phase" where most people enter in their 20's and grow out of in their 30's; doing lots of work for friends and family who are "On a Budget" and persuade you to work for FREE or even less!

    Study your Job Profitability Reports and determine who your Prime Client is and begin to understand the Difference Between Customers And Clients. 

    9. Working On Jobs Outside Your Area Of Expertise

    If you are a residential remodeler and darn good at it, don't fool yourself into thinking, you can just as quickly be a spec home builder or worse yet someone who can work on commercial tenant improvement projects. The skills, tools, specialty contractors, and workflows are different for each of these areas.

    10. Working On Jobs Outside Your Geographic Area

    Windshield time kills profits! The only people who make money on windshield time are the construction workers. Sharp bankers and lenders will ask about this one. Make sure you have Job Profitability Reports to show why you are working outside your geographic area.

    Your geographic area will depend on the contracting work you do. Consult your construction accountant, and your Job Profitability Reports to help you determine what makes sense.

    In conclusion

    Hopefully, you have gained some insights into the banking, lending, and bonding industry. I strongly suggest you get your contractor bookkeeping into the hands of someone who understands the difference between construction accounting and regular accounting and put together a Board of Advisors so that you can get your construction company on track to make you lots of money.
    Lost and tired of your bookkeeping system? If you are using QuickBooks and doing your own books (or have a staff doing it for you), I recommend you head on over to our Construction Accounting Academy site and check all the classes available to you immediately. Master the skills needed to generate useful reports, repeat quality performances, and make informed decisions to operate and grow your construction company.

    Learn More At Construction Accounting Academy


    About The Author:

    QuickBooks-Trainer-Randal-DeHart-PMP-QPA-Fast-Easy-AccountingRandal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington. He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, and QuickBooks For Contractors Expert. This combination of experience and skill sets provides a unique perspective which allows him to see the world through the eyes of a contractor, Project Manager, Accountant and Construction Accountant. This quadruple understanding is what sets him apart from other Intuit ProAdvisors and accountants to the benefit of all of the construction contractors he serves across the USA. Visit to learn more.

    Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Check out our Contractor Success Map Podcast on iTunes. 



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