FinTech Lenders Help Subcontractors | PYMNTS.com

Commercial construction, a $900 billion industry in the U.S., has the longest days sales outstanding (DSO) of any mature industry — 83 days.

“That’s the days between when a subcontractor invoices the general contractor and the general contractor pays them,” Gregg Lund, CEO at Struxtion, told PYMNTS when sharing that data. “In the value chain of material suppliers, [subcontractors], [general contractors], owners, banks that the owners may use to fund their projects, [subcontractors] are the smallest player in the value chain and essentially they front all of the working capital expense for really that $900 billion worth of commercial construction put in the ground.”

At the same time, banks often shy away from lending to subcontractors because these small businesses generally have contracts that have progress payments and that say they don’t get paid until the general contractor gets paid by the owner.

Meeting the Capital Needs of Subcontractors

In addition, the subcontractor’s cash flow is lumpy because they work for a month, buy materials and pay for labor and then wait 60 days to 90 days to get paid.

“Those really are the pinch points in the industry,” Lund said. “The smallest person in the value chain is running all of the working capital needs with limited financing options.”

The Struxtion FinTech platform provides contractors in the commercial construction industry with tools that make working capital accessible and lower cost.

Two categories of subcontractors typically come to Struxtion, Lund said. One is the smaller subcontractor that hasn’t had time to build up its balance sheet. The other category includes subcontractors that are growing, outpacing their line of credit and seeking access to liquidity.

“As you can imagine, at 83 days outstanding on average, it’s really tough to grow,” Lund said. “So you need that capital to sort of continue to prime the pump, get to the next job, pay for the materials and get your labor started.”

Allowing for Full Transparency in the Platform

Struxtion has partnered with Solid Financial Technologies to utilize the Solid FinTech-as-a-Service (FaaS) platform to provide embedded banking functionality to help commercial builders meet their working capital needs.

The partnership with Solid provides the subcontractors with embedded banking functionality that is easy to use and supplies Struxtion with risk mitigation, Lund said. When Struxtion has made an advance to its customer on an approved invoice, it will get paid when the subcontractor gets paid. It’s all done in the subcontractor’s name, so the general contractor just pays the subcontractor as they normally do.

“The embedded banking functionality that comes with Solid allows for full transparency in the platform,” Lund said. “Because it’s embedded, [subcontractors] have the ability to see what’s happening through the embedded bank account as it’s integrated into our platform.”

This transparency also allows Struxtion to stay within the confines of the collateral. Struxtion also uses other tools to understand what’s happening in the subcontractor’s existing operating account, and the general contractor it’s working with.

“We’re trying to reward small subcontractors for access to great products, great [general contractors], great owners, because ultimately they have underwritten the subcontractor from a performance perspective because their risk of non-performance is significant,” Lund said.

By using alternative decisioning data, customizing the process and relying on automation to lower costs, specialty lenders like Struxtion can make deals that would be too small for many banks to handle — such as lending on invoices as small as $7,000 and making $85.

“For us, it’s frictionless, the cost is minimal, and it’s another hundred bucks in our pocket,” Lund said. “Even more importantly, it’s the beginning of a relationship that’s going to grow from $7,000 advances to $15,000, to $20,000, to $50,000, to $100,000.”