contractor financing p. leon king | managing partner
TRANSCRIPT
• 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
• 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
• 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
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verv
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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: [email protected]