Contractor Financing

P. Leon King | Managing Partner

• Need working capital

• New contracts

• Difficulty obtaining traditional funding

• Need equipment

• Payroll and expense management, construction

• Experiencing rapid growth

• Short operating history

Typical Client Scenario

Contractors who run well-managed, profitable enterprises, keep promises, deal fairly with others and perform obligations in a timely manner will qualify for financing

Qualities We Look For

1. Pre-qualification

2. Application

3. Underwriting

4. Setting up resource monitoring services

5. Initial funding

6. Revolving credit cycle

The Road to Funding

• Industry Types

Construction

Service contractor

• Contract Types

Government (city, state, federal)

Large, financially stable corporations

• Bankable invoices

• Pass preliminary review of character, capacity, credit and collateral

Pre-Qualification

• Character What one does when no one is looking

• CapacityThe ability to perform the work

• CreditEvidence that previous debts have been repaid on-time

• CollateralProperty, invoices or other assets that will guarantee repayment to the lender

The 4 “C’s” of Contractor Finance Underwriting

• Review application part 1

• Review summary business plan

• Run personal credit checks on all principals and guarantors

• Proposed line of credit

• Terms

• Conditions

• Request for application fee and additional information and documents

Preliminary Underwriting

If underwriting requirements are met, a proposal will be issued:

Application

• Company information Name, address, type of business, date of

incorporation, federal tax ID, specialty, accounting history, history of tax filings, credit history questions

Line of credit requested Principal officer and shareholder information Current borrowing relationships Assets assigned or pledged as collateral for

present loans Signatures authorizing corporate and personal

credit checks

• Brief executive summary of business plan• Current corporate financials • Organizational documents (certificate of

incorporation, etc.)

Application Part 1

• Corporate financial information explanation

• Bonding relationships, if appropriate

• Brief explanation of largest contracts to date

• Subcontractor references

• Key personnel

• Insurance summary

• Subsidiaries and affiliates

• Professional advisers

Application Part 2

• Current corporate financial statements, including balance sheet & income statements (3 months)

• Current A/R and A/P aging

• Current work in progress report

• Corporate tax returns for the past 3 years (full copies)

• Certificate of incorporation

• Personal tax returns (each guarantor) for the past 3 years (full copies)

• Current personal financial statements (each guarantor) – dated less than 3 months prior

• Certificate of insurance showing general liability and workers’ compensation coverage

Requirements

Submit with Application Part 2

• Copy of contract(s) to be financed, with bid, complete estimate and project schedule

• Business plan including:

Company description, current status, goals and objectives

Resumes of principals and key employees

• Trade letters of reference (owners, GCs, suppliers, A&Es, etc.)

• Letters of reference from banks or other lending institutions, with current documents of any outstanding loans

• Copies of all MBE, DBE, HUB and 8a certifications

• Payment and performance bonds, if applicable

Requirements (cont.)

• Review credit checks for principals and guarantors

• Perform corporation credit check

• Contact references

• Verify financial and tax information

• Perform initial plan review for the project to be financed

• Prepare credit memorandum

Final Underwriting

• Maintain financial stability of a project

• Review pay applications; compare to site reports

• Review invoices

• Compare invoices to schedule of values and change orders

• Issue and collect lien releases from subcontractors, vendors and suppliers

• Issue checks in name of contractor

• Provide detailed status reports

How the RMS Program Works

RMS Process Flow

• Credit memorandum evaluated by lender

• Loan documents prepared and signed by all parties (lender, administrator, contractor)

• Resource monitoring services agreement prepared

Approval and Establishing Line of Credit

Required set-up items

• Signed RMS agreement• Signed contractor’s letter of agreement• Fully executed “Directive of Draw” or “Assignment of

Claims”• Detailed schedule of values• Cost account code breakdown• Copy of contract(s)• Copy of original bid• Copy of production schedule(s)• Copy of contract to subcontractors• Complete list of subcontractors and suppliers

Required RMS actions• Establish disbursement account at bank• Set up contractor and project(s) in RMS contractor

accounting system

Setting Up the RMS Program

1. Credit line approved for applied for amount

2. Loan approved and RMS program in place and all documents signed

3. Loan documents are signed

4. A/R invoices and/or pay applications have been submitted and are approved, establishing availability of loan funds against the line of credit

5. A/P invoices are submitted to RMS for approval against budget and prepared for payment

6. Funds disbursed to RMS for payment of approved A/P invoices and credit line is reduced accordingly

7. RMS pays A/P invoices

Initial Funding

• Credit line established

• Funds become available based on eligible invoices and/or pay applications

• Funds are disbursed through RMS program, reducing credit line

• Funds are received by lender in payment of eligible invoices and/or pay application, replenishing credit line

• Fees and interest are paid as funds are received and disbursed

• As project requirements dictate and cycles are completed successfully, the credit line may be increased

• The revolving credit cycle continues

Revolving Credit Cycle

Revolving Credit CycleRevolving Credit Cycle

• Would you be able to perform the project without the financing?

If not, there is no cost for financing, only profit gained from completing the project

• If you are able to negotiate discounts from subcontractors and suppliers as a result of paying them in a more timely fashion, financing and administration fees are an investment that delivers returns

How Much Does It Cost? How is It Paid?

Fee

& in

tere

st o

verv

iew

Approximate Fees and Interest

• Part 1 app/preliminary underwriting fee: No charge

• Part 2 app/due diligence/application fee: $500

• Commitment/loan origination fee: 1% of approved line of credit(For $100,000 line: $1,000)

• Finance charges: 1.5% of each advance

• Interest: 1.3% per month of advance/pro rated daily (fluctuates with prime rate)

• RMS fee: 1% of contract amount

• Approximate total cost: 3.0% to 3.5% or less of project for which working capital is

provided

K-WAM Financial Solutions help

overcome financial challenges that

occur when you win a contract.

Now you can do what you do best…

Execute your contract!

The K-WAM Solution

Contact K-WAMFlorida

13245 Atlantic Blvd., Suite 4174

Jacksonville, FL 32225-7118

Phone: (904) 220-2567

Fax: (510) 751-0202

Cell: (510) 773-8326

 

California

4061 East Castro Valley Blvd., Suite 159

Castro Valley, CA 94552

Phone: (510) 537-1669

Fax: (510) 751-0202

Cell: (510) 773-8326

 

Online: www.k-wamfs.com

 Email: info@k-wamfs.com

Questions?