COMMON CENTS

Financing Growth

By Bo Mocherniak

Construction can be a notoriously difficult industry. Projects can require a significant amount of up front capital, and many construction firms struggle with financing. This can be especially frustrating for firms that are seeking financing for growth activities.
If you are looking for financing, there are a number of options you can consider:
Self-financing growth through a company's retained earnings is one of the quickest and easiest solutions to implement. This method involves re-investing a company's profits into growth initiatives. A business must manage its cash flow carefully and can take such steps as deferring shareholder bonuses, improving accounts receivable collections and deferred supplier payments in order to free up additional cash flow. Companies may also tap into their existing lines of credit to add additional capital.
Traditional bank financing is another popular means to raising capital. The current lending environment in Canada is extremely competitive as banks fight for new business. The influx of U.S. institutions to Canada, such as Wells Fargo, PNC and M&T Bank, have added to this competitive landscape. Banks are increasingly offering favourable terms to borrowers, which include low interest rates, lighter covenants and longer amortizations periods. These aggressive terms help to lessen the financial burden on borrowers in terms of repayment obligations and reporting requirements.
If a company is unable to raise traditional senior debt financing, it may look to mezzanine debt providers. These lenders often require less security on their loans, but in return, they require a higher interest rate, often in the double digits. It can be beneficial for borrowers to use mezzanine financing when they expect to be able to pay off the loan in a short period.
Don't forget to check into government programs, too. For example, Business Development Canada (BDC) is a federal crown corporation that provides financing, venture capital, and consulting services to businesses of all industries with a focus on small and medium sized businesses. The Canada Small Business Financing Program (CSBFP) operates under Industry Canada to provide small businesses with loans of up to $500,000 to finance eligible fixed assets. There are also many provincial programs.
If you are incorporated, you can consider equity financing by selling shares in your business to raise funds. In fact, there is an increasing grey-market for the trade and issuance of shares in privately held businesses. The Ontario Securities Commission is even looking into creating an alternate private business exchange. Shareholders can inject much needed cash, but they also expect a good return on investment and may want a say in how you run your business. Equity financing is also the most expensive type of financing, since a company is required to cede partial ownership of the business to outside investors.
Joint Ventures are another popular option to help capitalize projects. They carry several advantages, such as risk-sharing, the ability to keep debt off the corporate balance sheet, assistance in winning projects through existing relationships or expertise, and they may help to overcome funding hurdles for a project or ability to take on larger projects if the partner has strong financial or reputational standing.
Beyond these traditional routes, there is much talk these days about alternative financing; Canada has seen increased inflow of investment capital from overseas (i.e. convertible notes, high-yield debt or private placement debt). While these avenues are easily available to larger public entities, the best way for private businesses to access overseas funding is through a commercial finance broker who has an existing book of lenders with development finance products.
While many of these tips and ideas can be used in a variety of industries, there are a couple of additional options that are specific to construction. I often see situations where companies need to finance the acquisition of the land, which leads to the lender also providing construction financing. Another strategy when buying land involves a "vendor take-back mortgage," which are often below market rates. This involves getting the seller to provide a portion of the mortgage loan, allowing the construction buyer to save up front capital to develop the land. It can also provide a way for construction companies to purchase property that would normally be beyond their financial limit.
I'd like to highlight an additional financial challenge that a lot of developers don't take into consideration. As we all know, given the competitive market and the rising cost of materials, profit margins on projects can be very tight. If you take on too much debt to finance your project, profits can easily be eaten up by interest costs. My final tip, then, would be to beware the costs of debt, and factor these into your financial planning.

With over 30 years experience with audit, acquisitions, divestitures and valuations, Bo Mocherniak, CA, CBV, provides services to both public and private companies in Canada and the United States. Bo is National Sector Leader for the Real Estate and Construction Group of Grant Thornton Canada, a member of the Grant Thornton International Real Estate Sector Group and past Chair of Grant Thornton LLP.  He can be reached at bo.mocherniak@ca.gt.com.

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