Leveraging construction financing for your climate startup

Running out of cash in the middle of a construction project can have catastrophic consequences for your climate company, whether you’re acting as a contractor or subcontractor. You risk either becoming insolvent or experiencing severe delays while you wait to get paid, which can also kill your business. In these moments, construction financing tools can act as a lifeline, fixing your cash flow problems and keeping your subcontractors and vendors happy while you work towards hitting the next milestone. 

Joel Garcia is CEO of Elastic (an Enduring Planet portfolio company). We sat down with him to discuss why you might experience a cash shortfall during a construction project, what to expect from lenders, and tips for avoiding getting shortchanged.

Why cash can be slow to come in

Commercial construction payments can be structured in one of two ways. Most commonly payments are released when you hit milestones, like mechanical completion, substantial completion, and final completion. Here, any project delays or change orders can mean your bank account stays empty while bills pile up.  As the contractor, you’ll be able to invoice once milestones are completed, and then your customer will have 30-90 days (depending on what you negotiate) to pay.  This could mean that you pay your suppliers and team, but don’t get paid back by your customer for 30-90+ days, depending on what the milestone entails.The second way is progress billing, where you’ll define with your customer – or contractor, if you’re a subcontractor – how often you’ll send invoices. Progress billing allows you to bill for partial completion of a milestone or scope, usually on a regular schedule (e.g., monthly).  Instead of waiting to complete an entire milestone, you assess the percentage of work completed during the billing period. For example, if you've completed 50% of the Mechanical Completion milestone, you can bill for 50% of that work.

This allows for more regular cash inflows, improving your ability to cover ongoing project costs. However, payment delays can still occur — especially if you're billing a GC who must wait for owner funds before paying subs — meaning you might still face a 30-45+ day wait after invoicing.

… But fast to come out

Generally, you’ll need to pay your equipment rental providers, as well as your suppliers and material providers, net 30 (i.e. 30 days after they invoice you for goods and/services). But most pressing is paying for your labor, which generally has to be paid weekly or bi-weekly. 

So, to solve this mismatch between cash in and cash out, you’ll need to either (a) strain your balance sheet a bit or (b) look towards credit.  

What construction financing looks like

The kind of finance you’ll be able to access depends on your company’s stage. Early on, your options are limited, but one option is going to factoring companies, who will give you a loan against your invoices. However, this is very expensive, and usually requires a history of invoices, which you might not have if your company is very early. 

Your second option is going to private lenders, like Enduring Planet.  Private lenders will finance a range of possible collateral (invoices, POs, the contract itself, equipment, etc), with a variety of instruments.  As your company matures, your access to finance will widen, and you’ll be able to acquire lines of credit and term loans from your bank.

What to expect from the process

If you’re going to factoring companies, be prepared for conditions like personal guarantees as well as an all assets lien. There’ll also be financing fees in place, usually amounting to 2% a month with a minimum use period of three months. You can draw funds weekly, but if you’re a subcontractor, funds might flow to your general contractor first, and then to you. Lenders will set up weekly ACH payments from your bank account or a designated project bank account, and may apply a deposit account control agreement (DACA) to ensure they can recover the funds.

The application, underwriting, and funding processes will vary widely across providers.  Before you go down this path with any given lender, make sure to ask questions around timelines, diligence requirements, collateral requirements, etc to make sure you plan accordingly.

How to successfully access this financing

To secure this cash when you need it, you’ll need to have your finances in order. That means your financial statements like your P&L, cash flow, and balance sheet – both for your company and for your projects. Showing lenders that projects you’ve delivered in the past have been profitable will give lenders more confidence. Usually, these statements won’t need to be audited. You’ll also need a statement of qualifications showing your company’s track record and technical abilities. Plus, a project schedule that reflects the cash outflows of the pro forma, and shows your project’s progress by laying out your milestones and the schedule of values.

What to keep in mind when seeking this financing

1. Know what protections you have 
In construction, there’s two important securities that you have as a contractor or subcontractor, which then (a) improve your creditworthiness with lenders and (b) mitigate your own risk of default.. 

First is lien rights: say you’re building solar panels on the roof of the garage of an apartment complex, and it’s a $100k job. If you don’t get paid by the customer, you can file a lien against the whole property and potentially force the sale of the asset to recover what you’re owed. 

The second protection is prompt payment rights – meaning if you finish the job, the customer has to pay up after a certain window of time, and you can start accruing interest if they don’t. Including these two points in your contract will make it more secure from a collateral standpoint, and get you better terms from any financier. Make sure that you're clear on the lien structure, you know how to file a UCC on a customer, and you’re referencing the law where needed.

2. Check your contract
Construction contracts often contain clauses that govern the timing and obligation of payments to subcontractors. Among the most significant of these are "pay when paid" and "pay if paid" clauses, which, despite their similar wording, carry fundamentally different implications for risk allocation and payment certainty. Understanding this distinction is vital for all parties in the construction chain, particularly subcontractors.

At its core, the difference lies in whether receiving payment from the owner is a condition precedent to the contractor's obligation to pay the subcontractor, or merely a mechanism that dictates the timing of that payment.

A "pay if paid" clause is a condition precedent to the subcontractor's right to receive payment. This means the contractor is only obligated to pay the subcontractor if and when the contractor receives payment from the owner for the subcontractor's work.

In essence, "pay if paid" clauses transfer the risk of the owner's non-payment down to the subcontractor. If the owner fails to pay the prime contractor, even for reasons unrelated to the subcontractor's performance, the contractor may be entirely excused from paying the subcontractor.

Due to their potentially harsh impact on subcontractors, the enforceability of "pay if paid" clauses varies significantly by jurisdiction. Some states prohibit or severely restrict these clauses, viewing them as against public policy because they can force subcontractors to bear a risk they have little control over and potentially waive their right to payment for work performed.

A "pay when paid" clause, on the other hand, is generally interpreted as a timing mechanism. This type of clause indicates that the contractor will pay the subcontractor after receiving payment from the owner, but it does not extinguish the contractor's ultimate obligation to pay the subcontractor if the owner defaults.

While a "pay when paid" clause allows the contractor to delay payment to the subcontractor until the owner pays, it typically does not absolve the contractor of the responsibility to pay the subcontractor within a "reasonable time," even if the owner never pays. What constitutes a "reasonable time" can be a subject of legal interpretation and may depend on the specific circumstances and jurisdiction.

In general, you should try and avoid both of these clauses, and instead settle on milestone or progress billing.

3. Look out for bad actors 
Some invoice factoring companies can be predatory. Vet any potential lender carefully before you make any deals – ask for referrals from other contractors, look at case studies, and ask potential lenders hard questions, like where their money comes from and how they operate when things go wrong.

Joel is a solar industry entrepreneur with over 14 years of experience spanning project development, financing, and construction. He is the Founder and CEO of Elastic Ventures, a solar engineering and construction firm revolutionizing power infrastructure through fixed-cost engineering and turnkey project execution. Since launching Elastic in 2023, he has led the company to engineer over 1 GW of projects across 30 states, achieve triple digit revenue growth, and expand into construction.

Prior to Elastic, Joel founded Wirewatt, Mexico’s largest solar financing platform at its peak, supporting 1,300+ solar companies with loans in 30+ cities, and built Liif, a solar EPC operating in four Mexican states. He holds a B.S. in Electrical Engineering from the University of Texas at Austin, with a minor in Power Systems and Renewable Energy.