Better Funding Access Gives Small Construction Firms an Easier Path to Growth

Credit has always been hard to come by in the construction business. Coupled with slow bill payment, that fact explains why the industry often cites cash flow as its biggest problem — especially at small- to medium-sized businesses (SMBs).

Lack of easy access to credit is the No. 1 reason why so many construction companies ultimately go out of business. So, there’s a clear opportunity for FinTechs like Flexbase, which said it’s able to provide much larger amounts of financing than any bank is willing to consider.

“Growing up, I would hear my family talk a lot about the problems in the construction industry,” said Flexbase Founder and CEO Zaid Rahman told PYMNTS in an interview. “I would hear them complain a lot about cash flow as their biggest concern.”

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Just about everyone in Rahman’s family is involved in the construction business in one way or another. His father owned a construction firm, for example, while his uncle runs an architectural consulting company. Both of his sisters are architects. So, he said he knows better than most how difficult it can be to balance the books in an industry that’s notorious for clients that don’t want to settle their bills, pay hundreds of days late and sometimes refuse to pay at all.

“My father had a really difficult time at a personal level,” he said. “One client jilted him on a multimillion-dollar invoice, and the stress ended up causing physical problems for him.”

Many banks tend to shun construction companies that ask for financing because they’re aware such problems exist, Rahman said. In addition, they don’t have a sufficient credit-scoring model specific to the industry. At best, they typically look at the personal credit score of the business owner and make an offer based on that data alone.

“There isn’t any lender out there that underwrites construction companies based on the quality of their revenue, clients and work,” Rahman explained.

At least until Flexbase burst onto the scene. The 2-year-old startup specializes in funding for the construction industry, targeting businesses of all sizes — ranging from Jane the Plumber to firms with hundreds, or even thousands, of contractors.

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Flexbase can take on the risky job of funding builders thanks to the data it collects through the Flexbase Payments platform. As Rahman explained, the platform helps construction business operators automate much of the revenue collection process. Whereas most companies today still rely on paper-based invoices and checks in the mail, the Flexbase platform automates those processes, sending out regular reminders via text and email. It can also send reminders to nonpaying clients with a single click.

The platform makes life easier for construction firms, but it also gives Flexbase a lot of data on how efficient they are, making it easier for the company to underwrite them.

“So, we can tell if you are working on a Salesforce Tower with a tier one client and a tier one bank supporting that client, versus if you’re doing a small residential renovation project,” Rahman said.

That allows Flexbase to dynamically price the risk of each client it serves and offer them much more generous lines of credit than any bank.

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“We have a richer understanding of your inflows and outflows,” Rahman said. “For our average customer who does $2 million to $3 million in revenue, we can easily give them a couple of hundred thousand dollars in credit right out of the gate.”

With the launch of a new branded credit card this week, Rahman said he believes Flexbase can empower hundreds of smaller construction firms to benefit more from President Joe Biden’s infrastructure bill. That bill is likely to drive a big jump in U.S. construction spending over the next few years, Rahman said, and the credit Flexbase provides can make a difference in how that money is divvied up.

It used to be that only the biggest construction companies could win large government contracts because they were the only players in the space able to secure the necessary financing for them, Rahman said. Banks won’t talk to any of the smaller players, even if they have the required expertise.

“So, we are going after the small guys and providing them with the ability to grow their business,” Rahman said. “So now they can meet the requirements of those large government contracts.”