MATERIAL FINANCING COST: WHAT THE FEE ADDS UP TO.
Material financing comes in several forms: supplier credit, a bank line of credit, a company that pays the supplier and collects from the contractor later, or an advance against a submitted pay application. Each has a cost, and the cost is usually quoted per period, such as 2 percent per 30 days. The total is the fee times the number of periods the money is outstanding. A 2 percent fee for 30 days is 24 percent a year, using $100,000 for 90 days costs $6,000, and the question is whether the job's margin can pay that.
Material financing is a good tool when the job's margin can afford it and a poor one when it cannot. A fee that sounds small per month is large per year, and the job pays the cost even when nobody on the project sees an invoice for it. This page shows the math, so any offer can be converted to a yearly rate and to a dollar cost on a real job.
WHAT IT MEANS.
Material financing is short-term funding for the material package on a job, so the supplier is paid on or before delivery and the contractor repays after the general contractor pays.
The examples use fees of 1, 2 and 3 percent to show the math. They are not quotes from any lender, and real rates depend on the lender, the job and the contractor's credit.
HOW TO PRICE THE MONEY.
The forms it takes
Supplier credit means the supplier waits, usually 30 days, and sometimes gives a discount for earlier payment. A bank line of credit charges interest on the amount drawn. A financing company pays the supplier directly and the contractor repays later with a fee. A pay application advance pays part of a submitted pay app before the general contractor pays it. Each form has a different fee and a different limit, and all of them can be priced with the same math.
Why the fee is quoted per period
A fee of 2 percent per 30 days is easy to accept and hard to compare. To compare offers, convert each one to a yearly rate: fee times 365 divided by the days in the period. A 2 percent fee for 30 days is 2 x (365 / 30), or 24.3 percent a year. A 1.5 percent fee for 60 days is 9.1 percent a year. A flat 3 percent fee for 90 days is 12.2 percent a year. Ask whether the fee is flat for the term or repeats every period, and what happens on day 31.
The dollar cost on a real package
The yearly rate counts for less than the dollars on the job. On a $100,000 material package outstanding for 90 days, a fee of 1 percent per 30 days costs $3,000, 2 percent costs $6,000 and 3 percent costs $9,000. On a $300,000 contract with that package and a 10 percent margin, the margin is $30,000, and a $6,000 fee takes 20 percent of it.
An early payment discount can beat financing
The terms 2/10 net 30 give a 2 percent discount for paying within 10 days rather than 30 days. Paying 20 days early to save 2 percent equals (2 / 98) x (365 / 20), or 37.2 percent a year. At 10 percent a year, borrowing $98,000 for those 20 days costs about $540 and saves $2,000. When the discount is offered, taking it is often the cheapest financing on the job.
When financing pays and when it does not
Financing pays when the margin on the job is large enough to cover the fee and the work cannot start without the material. It does not pay on a job that was bid too thin, because the fee comes out of a margin that was already small. Financing a thin job makes the loss larger and later, not smaller.
WHAT IT LOOKS LIKE IN DOLLARS.
Yearly rate = fee x (365 / days in the period). 1 percent per 30 days is 12.2 percent. 2 percent per 30 days is 24.3 percent. 3 percent per 30 days is 36.5 percent. These are simple rates before compounding. Monthly compounding of 2 percent gives 26.8 percent.
At 1 percent per 30 days, $3,000. At 2 percent, $6,000. At 3 percent, $9,000. As a share of a $30,000 job margin that is 10, 20 and 30 percent.
At 10 percent a year a bank line costs $2,466 on $100,000 for 90 days (100,000 x 0.10 x 90 / 365). A 2 percent fee per 30 days costs $6,000 for the same time, which is $3,534 more. A bank line has a credit limit and needs approval, and it may already be used for payroll. That is why contractors look at other forms. The point is to know the cost difference before choosing.
WHAT WE CHANGE.
SPM adds the cost of the money to the estimate by job: the number of days between paying the supplier and collecting, times the rate on the money used. A job that needs financing is bid with the fee already in the price.
Deposits and delivery dates are staged so the first delivery lines up with the first pay app that can bill it. Where the contract allows, stored material is billed, which reduces the amount that has to be financed.
The 37.2 percent calculation is done for every supplier discount. When the discount is worth more than the cost of the cash used to take it, the line of credit or the cash is used to pay early.
Each offer gets one row: fee, period, days used, dollar cost on this job, yearly rate and share of the job's margin. Offers are compared on dollars and on yearly rate, never on the per-month figure alone.
FLAT MONTHLY FEE. NO SURPRISES.
Three tiers, priced by your trailing twelve month revenue. Which one you're in depends on how much of the work you want off your desk. No hourly billing. No payroll. The one-time onboarding fee is right here in the table.
| Last 12 months revenue | Monthly fee | One-time onboarding |
|---|---|---|
| Up to $1M | $1,900 to $2,900 | $1,000 |
| $1M to $3.5M | $2,600 to $3,900 | $1,500 |
| $3.5M to $6.5M | $3,800 to $5,700 | $3,000 |
| $6.5M to $9.5M | $5,100 to $7,100 | $4,500 |
| $9.5M to $12.5M | $6,100 to $8,500 | $6,000 |
| $12.5M to $15.5M | $7,400 to $11,000 | $7,500 |
| $15.5M to $18.5M | $9,400 to $13,500 | $9,000 |
| $18.5M+ | Quoted individually | Quoted individually |
The onboarding fee covers migrating your books back to the start of your last taxable year and getting you fully operational in 60 days. It's billed once, with your first invoice. It's the same for all three tiers. Your first month is prorated, and your monthly engagement starts on the first of the first full month.
Range reflects the three tiers below. Which one you're in depends on how much of the work you want off your desk. No payroll. No hidden line items. The onboarding fee is right here in the table.
You stop guessing.
You get the CFO work. Job costing built against the way you estimate, a 13 week cash forecast, monthly WIP, and a meeting every month that ends in decisions and never in a report.
Your bookkeeper still does the books.
You stop touching the books.
Everything in Core, and we do the bookkeeping and the controllership as well. Your office stops answering coding questions and stops fixing a reconciliation that will not balance on the last day of the month.
We do the books. No payroll.
Every job shows its margin while it is still open.
Everything in Executive, plus the job costing and WIP platform set up, loaded with your cost codes, and managed for you every month. You never have to learn it.
We do the books, the job costing, and the software. No payroll.
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