Pandemic Pressure: Decline in Construction Factoring Calls For New Strategies
Even though construction has generally been considered essential during the COVID-19 pandemic, there has still been a dramatic slowdown in the industry. Brent Chambers of CapitalPlus Construction Services provides an outline of how the construction factoring industry is faring and explains why focusing on developers is and will continue to be important.
BY BRENT CHAMBERS
With nearly 20 years of experience factoring construction firms, you would think I had seen everything. Then came COVID-19 and the unimaginable became a new reality. With the onset of stay-athome and shelter-in-place orders, layoffs began almost immediately in nearly every industry, especially in construction. Unemployment numbers quickly began rising at an alarming rate. According to the Bureau of Labor Statistics, a year ago, the overall unemployment rate in the construction industry was 4.7%. This year, it jumped from 6.9% in March to 16.6% in April and continues to climb, leaving economists to speculate how high it will go.
The pandemic has affected every construction firm in one way or another. These impacts vary, from immediate concerns about the health and welfare of employees and the construction material supply chain, to delayed starts due to a slowing permitting process and stop-work orders, which vary by state. Thankfully, in most states, construction was considered an essential service, especially on critical infrastructure.
CONSTRUCTION SLOWDOWNS
As a construction factor, CapitalPlus immediately felt COVID-19’s impact as new lead generations dropped 25% in the week following the release of government guidelines to slow the progress of the virus. Shortly after, Congress approved the Paycheck Protection Program (PPP) and SBA 7(a) federally backed loans. Prospect after prospect in our pipeline fell silent. Those who did return our calls said they were pausing their application while they applied for an SBA loan through the PPP. As I write this article in mid-May, lead flow has rebounded a bit, but it is nowhere near pre-COVID-19 levels.
A large portion of our pipeline, especially the quality leads, comes from our broker or referral network. We usually build or maintain our broker network by being active in various organizations like the IFA and attending conferences and events. With those now on hold for at least the foreseeable future, we had to turn inward. As a former businessman in an engineering and construction project management firm, I learned that it is easier to get more business from an existing client than it is to go find a new one. We made every effort to increase contact with previous and current clients as well as our broker network to let them know we are still open and ready to assist.
In addition, we took time during this slowdown to do the low-priority tasks that can often take a back seat to growing the business. We upgraded and cleaned up our CRM and other software programs with the goal of driving efficiency. We reassessed our processes and procedures, again looking for ways to improve on the quality and speed of business.
No one knows what the future holds. With the current unemployment crisis exceeding that of the Great Depression, uncertainty is the one consistent word you hear when speaking of the future. Will we all get back to work in the summer months as the virus fades and enjoy an economic rebound? Or will the virus rebound in the fall and bring business shutdown 2.0?
FOCUS ON DEVELOPERS
All any of us can do is focus on the things we can control, including how thoroughly we underwrite, who we fund and, post funding, how we manage our risk. In construction factoring, we want to understand our clients’ financial position, but equally, if not more importantly, we want to focus our due diligence on the debtor and their ability to pay. In these uncertain economic times, we have added a step to our underwriting and are looking upstream at the developer/ owner, also known as the funding source. As we learned in the Great Recession, issues in the construction space largely started with developers/owners and their ability to finance projects. At first, payment on most projects slowed as the funding trickled down the chain. As conditions worsened and funds dried up, projects came to a halt or shuttered in place indefinitely. And in many cases, the owners filed for bankruptcy, leaving everyone down chain to fend for themselves.
As a result, we now look at the strength of the owner and their history of payment, at liens filed against them and for any signs of bankruptcy. Where there is concern or uncertainty, we either do not fund or we mitigate our risk by limiting the credit ceilings and lowering the advance rate while using the strongest estoppel language, or sometimes, all of the above.
As our company has grown and evolved, the majority of our financing includes contract funding or long-term factoring facilities. When providing funding of progress invoices over the life of a project, operational performance and compliance with the contract by our customer is paramount to our success. Monitoring these parameters while continuing to fund requires a team effort. When you add the potential impacts caused by the pandemic, this becomes a big lift. To understand the impacts on our clients and their projects and to stay ahead of danger, we have increased communication with our clients and their debtors. It is no longer sufficient just to check in with the client when funding. We have doubled down on these communications, requiring both the assigned account manager and the account executives (business developers) to check in on the client on a biweekly basis. These conversations are captured in Salesforce so that anyone can look at the chain of communication to identify evolving issues and pinch points that need to be addressed.
While we hunker down in these uncertain and stormy times, we also recognize that history points to a silver lining. During shaky economic times, traditional lenders often tighten their belts and steer clear of risky or out of favor industries, including construction. At CapitalPlus, we have the experience and know-how to help construction companies navigate the potholes and find the working capital they need to help them through the challenges.
Brent Chambers is executive vice president of CapitalPlus Construction Services.