Cash Flow and the 5Cs of Credit - Collateral

The 5Cs of Credit consist of Character, Capital, Capacity, Collateral, and Conditions.

D. Brown Management Profile Picture
Share

The 4th of the 5Cs of Credit is how much and what type of collateral the contractor will put up as a guarantee.  

Cash Flow: 5Cs of Credit. Collateral.

When the underwriting requirements are relatively small, this is often done like a personal credit card. Very quickly, however, the collateral requirements will increase.  

For specific purpose financing, such as for a piece of equipment, building, or land, the collateral is often just the title for what is being financed. The amount of capital or down payment that is put into the deal is what the contractor puts at risk.  

For an Operating Line-of-Credit (LOC), a bank may ask for some or all of the following with differing conditions:

  • Rights to directly collect on your Accounts Receivable (AR) via a UCC-1 filing. The value of your AR as collateral is often a discount in the 80% range, excluding past-due receivables and single customer concentrations over 20%.  
  • Second position behind any specific financing on fixed assets, including vehicles, equipment, and real estate.  
  • Personal guarantees from the owner(s) of the construction business.  

Sureties and other underwriters will look at some combination of this collateral and may want to place themselves in a position ahead of the bank in specific circumstances.  

Collateral is often a challenge during succession plans as risk is being transferred.


Cash Flow
Great cash flow is a key driver of valuation and successful successions. Running out of cash is is the #1 reason contractors fail. Improving cash flow improves your Return on Equity. Protect yourself and never let cash flow be the limitation to your profitable growth....

Cash Flow
Great cash flow is a key driver of valuation and successful successions. Running out of cash is is the #1 reason contractors fail. Improving cash flow improves your Return on Equity. Protect yourself and never let cash flow be the limitation to your profitable growth....

Construction Labor Budget - Alternate Perspective
Improving craft labor productivity in construction will significantly reduce risk while providing a long-term competitive advantage for the contractor and every team member. This alternate labor budget perspective shows different opportunities.
Growth and Opportunity
Contractors that are growing profitably, have great reputations with their customers, and have a good culture are able to attract and retain the best talent even with the talent shortages the construction industry will face in the next 10+ years.
Definition - Capability
A team or company’s combination of skills, competencies, knowledge, processes, tools, and behaviors that allows them to Carry Out particular activities or achieve certain goals. Capabilities create the outcomes that customers are paying for.