6 ways for builders to access cash during the coronavirus outbreak

The coronavirus (COVID-19) outbreak has made it extremely difficult for some builders to access cash. With the NAHB/Wells Fargo Housing Market Index (HMI) plummeting from 72 in March to 30 in April, and unemployment surging, the need to access cash to cover for missed projections is becoming more important by the day. While the effects COVID-19 has on builders will continue to vary by locality, having strategies to access cash if necessary can be helpful to all. Here are 6 strategies that Steve Friedman, director at CohnReznick, recommends builders consider to access cash.

Convert backlogs to cash

Before the COVID-19 pandemic, home builders were in a strong position. In Q4 of 2019 and for most of Q1 in 2020, builders were showing strong sales. Because of this, most builders should have backlogs that they can potentially turn into cash. This may also include model-home-sale leasebacks.

To convert these backlogs, Friedman strongly encouraged builders to keep close to their local lobbying associations and encourage those associations to aggressively lobby to keep residential home building essential. As of now, only 6 states—Michigan, New Jersey, New York, Pennsylvania, Vermont and Washington—have deemed home building a non-essential service. However, Friedman mentioned that things can change fast. For example, New Jersey’s Gov. Murphy changed residential building from essential to non-essential with just 48 hours of lead time.

Nonetheless, this means that for the other 44 states, builders can and should continue building and try to turn any backlogs they have into needed cash.

Though selling homes during COVID-19 will likely be extremely challenging, 2-10 Home Buyers Warranty (2-10 HBW) is helping builders. 2-10 HBW is providing communications templates to help builders stay in front of clients and prospects during the outbreak. We’re still offering industry-leading structural warranties to protect builders and their homeowners from expensive structural claims. We’re also still providing complimentary marketing materials to our Builder Members.

Talk with lenders

If you haven’t already spoken with your lenders, do so now. Ask for an increase in advance rates. Friedman recommended asking them if you can take money off your revolver. This is a fairly straightforward strategy for accessing cash that many builders have already committed to.

Find people who can provide quick, readily available equity

The rallying cry for COVID-19 has been “we’re in this together,” so don’t be afraid to ask friends, family or private equity groups who have invested in you before for their help. The goal is to access cash as quickly as possible, which is why you should stick with people and groups you know.

Trying to access capital from new or unknown groups or people will likely take way too long and require way too many hoops to jump through. For example, if you request equity from a group you’ve never worked with before, one of the first things they’ll want is a financial projection. In these times, projections are incredibly fluid at best and impossible to make at worst. Additionally, trying to access capital from a new group will take valuable time away from doing what’s most important: managing your business.

Determine which communities will generate the most cash

You’re likely to have certain builds and communities that you can sell more easily than others. Do you know which ones those are? Determining which communities will generate the most near-term cash can help you access that cash more efficiently. You’ll likely need to do financial-sensitivity analyses to figure out which of your communities can generate the most cash the quickest.

Once you’ve figured that out, you can begin to consider putting less lucrative communities on hold. This may include deactivating building permits for communities that you think may take longer to sell. So, you’ll need to communicate honestly with your sales teams and get their thoughts on what they truly think they can sell and what they can’t. The whole goal of taking these steps is to conserve cash as much as possible.

Start cutting line items

Many builders have already begun cutting expenses to access cash. But there are some specific steps you can take that could help you keep cash on hand.

• Ask for rent relief. If you rent space, ask your landlord for rent relief. If you feel embarrassed doing so, don’t. You won’t be the first or last builder to make this request.
• Cut all travel and entertainment. Though it’s unlikely you have travel or entertainment in your budget anymore, double-check that you haven’t overlooked anything, such as subscriptions or dues.
• Defer owner and executive compensation, and reinvest. A tough pill to swallow is delaying compensation for owners and executives. Owners who have confidence in the company’s future might also consider reinvesting their own money in the company to keep it liquid.

Take advantage of federal lending programs

If you haven’t already taken advantage of the Paycheck Protection Plan (PPP), consider it. Congress recently reached an agreement to continue funding the PPP due to massive demand. The PPP is a loan that helps owners of small businesses (i.e., fewer than 500 employees) continue meet payroll. You can apply for this loan through an SBA-approved lender, such as your bank.

This loan is potentially forgivable, too. If you have subcontractors or salespeople who are independent contractors, encourage them to apply themselves, as you can’t do it for them. Even though you will probably experience delays, this is still a program worth applying for.

There’s still much uncertainty surrounding how builders can survive the economic slowdown. But these 6 tips can give you some ideas for how to access cash quickly. As much as possible and where allowed, keep building. 2-10 HBW will be there to back you up.

Learn how you can protect your business and add valuable selling points to your new builds with a 2-10 HBW structural warranty.