Abstract
Construction projects do not require a large capital outlay but a large working capital to start up the project. Unfortunately, for small contractors there are very limited options available from the banks or other lending institutions to cover this large working capital requirement in the absence of sufficient collateral. The “Project Finance” method presented in this paper is recommended as the most effective method for small contractors in the United States. The problems of small and start up contractors in funding their projects have been little addressed in the literature. The current financing practices were observed through both the literature review and interviews with contractors and bankers in the western Michigan area and subsequently a system has been proposed which could help a small start-up company seeking higher growth. The growth rates that can be achieved using the project finance system in contrast to the traditional “line of credit” arrangements as illustrated in this paper show that the project finance model is beneficial.
Highlights
One of the most pressing problems in construction projects is the working capital and liquidity required to support day-to-day activities
Over 10,000 construction firms failed in the United States in 1997, up from 8000 failures in 1990
Smallness and adolescence, pace of growth, and unplanned regional growth could be held responsible for the increased rate of business failures among the small construction firms
Summary
One of the most pressing problems in construction projects is the working capital and liquidity required to support day-to-day activities. More construction companies go out of business due to lack of liquidity to support their day-to-day activities rather than lack of technical capability to perform the job (Singh and Lokanathan, 1992). Over 10,000 construction firms failed in the United States in 1997, up from 8000 failures in 1990. The business failure rate of construction firms is about 30 percent higher than the national average of all industries (Schaufelberger, 1991). Besides various other reasons inefficient construction financing becomes the most critical cause for this failure. This paper reviews the existing financial practices in the construction industry and proposes a new project financing model for financing small and medium scale contractors
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