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Bad mistake being in the building business unless you are incorporated. You could loose all you ever worked for from a simple workers comp suit. Local banks should be your first choice. Play one against the other to get the best deal. Here we pay a percent over prime plus a discount point for each spec house we build. We get 80% loans, at 3/4% over prime and a 3/4% discount point. You should view your banker as a business partner and he can be a very important advisor for your future and growth. Good luck
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JB, Your question was operating capital?
I relied on my savings in the business to keep me flowing.or skip a paycheck now and then. But, if you are at 350k + don't you find that you always have 10k or more in receivables? Always? Go to your bank with the docs. they want and get a line of credit based on your company credentials only.IE incorporation papers. Don't sign personally for anything you don't have to. This also goes for suppliers as well. We have a standard credit app. for the company. If things go bad, then they can't take your home. PLEASE CONSIDER THIS!!!!
*A house that sells for 200,000 would qualify for up to a 80% loan ($160,000). The amount that the bank will loan depends on how much your net worth is and how experienced the banker thinks you are. HIS risk to reward ratio. The more he loans you, the more risk he has, thus the more he thinks of you, the higher percentage of APPRAISED selling price he will loan you. He may only loan you 75% if he thinks you are weak. Remember all of this is negoatiable. Then he gives you a Percent over prime. Here it varies from 3/4 to 2%. The lower the better for YOU, but remember it is a negoation. Depending on how strong you are financially. In addition, my banks charge a 3/4% origination fee for the entire loan amount. A up front fee at time of lot purchase. Some builders might pay 2%. You have to put yourself in a bankers point of view. They want minimum risk. This is the reason that you need to go to several bankers to see who offers the best deal. All things being equal, go with the banker you can talk to that has experience with builders. He can advise you on market conditions, your competitiion and realitors. E-mail me at [email protected] if you need additional info. For years I built "out of Pocket", but my business took off after I started my specs. I now have 22 houses in 4 subdivisions in various stages of completion. I closed on 30 last year. You have to have a banker to grow.
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I have been in business for myself for seven years as a custom builder/remodeler after growing up in the business and eventually partnering with my 'old school' father for ten years before his retirement. Living in a small town and a rural area his idea of bookkeeping was a verbal quote and a handshake. Needless to say, we did not use credit lines for working capital. The only credit accounts we had were with suppliers and subs.
When I started on my own, I began at square one with the business side taking in all the info I could to get all my ducks in a row. That accomplished, I now need to look at establishing credit lines to stabilize my cash flow. I have been able to do this with my own money up until now, but with my gross sales ($350,000.00) inching up about 25% every year, I am finding it increasingly difficult to handle. I do not build spec homes now, but am interested in doing so in the future.
The questions I have pertain to setting up these credit lines and how to maintain them. Are banks the best place to set them up or are there better places, such as; investment brokerages or institutions like the Money Store? Should I deal with the loan manager or would other loan officers do? What kind of paperwork would they like to see? Income tax returns? Balance sheets? Cash flow statements? Annual budgets? Contracts of future work? How much should I get the credit line set for? What kind of interest rates or fees should I expect? When does the amount have to be paid back?
So many questions. I appreciate any help anyone can give me, those of you who use credit lines for working capital or building spec homes. Thanks in advance for your time. JB
*So, 2nd generation contractor in rural area? With $350K gross? You da man!With the credentials you state, you could walk into any lending institution and and those boys will bow down to you. I mean, you can call the shots. You want to go straight to the big top, avoid the underlings. Deal with the president, manager, etc.Your first choice should be the local bank. You can negotiate %, fees, etc. If you are unsure of the questions to ask, think about hiring a CPA, or other, to be there with you. Much of the way they operate is regulated by the Feds, but they'll tell you this during negotiations. This goes for most institutions, bank or other."Any information can and will be used against you". Sound familiar? In other words, don't play all your cards. You don't need to reveal your P & L; cash flow; budgets, etc. I think you could get what you want by presenting your Schedule C from last year's 1040. Have all your future contracts, with amounts, ready, IF they ask. These should be the original copies, handsigned.How much? To determine this, you should look closely at your cash flow, current and anticipated. Also, look at depreciation of tools; what tools you'll need to replace, new purchases, etc. Will you need to hire additional staff or field labor? At what pay rate? What about employee benefits? Ins. premiums; bonds, etc? Also, do you pay yourself a wage yet? How about a retirement plan, do you have one? Don't take these out of profits. Much of the information you need here is gotten from past anecdotal information. When did you have to dip into your own pockets to cover cash flow? How could you avoid that? While the insituitions say they like to see a business plan, it really isn't necessary. Although, preparing such a plan is quite useful to you and your company. Be conservative here. You can use it to spot trends; it helps to flag--or indicate--certain changes, often times unanticipated. At the very least, it can be a milestone showing where you were when you put it together.Try to get a interest rate tied to a certain market index. Your tax attorney would be most beneficial here.BTW: Don't lie to the bank, or embellish your story. Don't try to grow too fast; don't expand into new markets until you have a good, solid share of your current market(s).
*Thanks for the reply, Rich. Lots of great info there.Actually, I'm a 3rd generation builder and being in a rural area in the Pacific Northwest is great, but we are usually the last ones to learn about them newfangled gadgets or putting anything in writing. I wasn't kidding when I said we used to build homes on a handshake. I do pay myself a wage when I'm swinging a hammer (I'm still a one man band, four field employees). I let profits take care of the rest, although that hasn't been what I'd like lately. What I meant by using my own money to stabilize cash flow is my company is a proprietorship and the money is cash reserves meant for growth, employee benefits, new equipment, etc... And that amount too, is not as great as I'd like. Using it means I'm not able to take advantage of it being invested for growth either.Very soon I will be at the point where I will have to bring in someone to handle the office management or step back from working in the field to do it myself. Something I do not yet wish to do or even have the right employees to do so.Anyhow, thanks for the advice, Rich. JB
*Bad mistake being in the building business unless you are incorporated. You could loose all you ever worked for from a simple workers comp suit. Local banks should be your first choice. Play one against the other to get the best deal. Here we pay a percent over prime plus a discount point for each spec house we build. We get 80% loans, at 3/4% over prime and a 3/4% discount point. You should view your banker as a business partner and he can be a very important advisor for your future and growth. Good luck
*Larry,Could you explain the discount point and how it works for say three homes selling each for 200k costing 150k to build?Never used a bank for spec financing.Thanks,Jack : )
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Larry,
Thanks for responding and for the info on financing.
Jack : )