Construction FinTech has evolved to target an array of financial friction points, with delayed payments, a mountain of paperwork and a crowded supply chain of contractors and subcontractors adding hurdles in the financial supply chain. Those challenges have led to 88 percent of contractors having to wait more than 30 days to be paid, despite their widespread willingness to discount their invoices for on-time payment, according to the Construction Payment Report 2018 published by Contract Simply.
Those delayed payments inevitably cause a chain reaction for contractors, which then have to wait to pay their own subcontractors, cover the costs with personal expenses or take out a loan to make their own payments. There is widespread opportunity for FinTech to enhance visibility into the B2B payments process in the construction space, promote faster electronic payments and boost cash flow visibility.
However, Sean Faries, CEO of construction loan-management software company Land Gorilla, said this is only one side of the construction payments coin. The other side applies to the lenders that finance construction projects, provide mortgages and often prop-up contractors' cash flow while they wait to get paid.
Indeed, nearly half of the survey respondents questioned in the Construction Payment Report said they seek credit lines or turn to personal funds to cover their cash flow gaps amid late payments. According to Faries, it's not just construction businesses that stand to lose from late payments, but their lenders, too.
"The lender has inherent risk when it comes to payment processes," he told PYMNTS in a recent interview.
Land Gorilla links construction lenders with technology to manage that lending process, a space that involves complexities and requires lenders to assess and manage risk based on a deluge of factors. Those include project duration and the risk of a project not being completed, managing permits, visibility into inspections and beyond. Many of these factors are key to not only underwriting a loan, but enabling a borrower to draw down on that financing.
In a recent move to streamline the management of all of these processes for the lender, Land Gorilla announced a collaboration with Zlien, another player in the construction industry that operates on the B2B payments side of the construction FinTech fence. In an effort to do away with liens altogether (which, Zlien CEO Scott Wolfe told PYMNTS in an interview earlier this year, are "the perfect example of what happens when things go wrong"), Zlien focuses on facilitating B2B payments in the industry, including the generation of lien waivers.
Land Gorilla comes into the mix by integrating that waiver into its own solution for lenders, as lien waivers are often required, among other documents, to process a draw request.
Separate Contract Simply research found that it takes a lender an average of 5.5 days to complete the process of a draw request, though borrowers said the process takes an average of 9.4 days. Faries said that integrations like the one with Zlien can promote efficiency in this process and reduce overall risk for lenders. That's because, while Zlien and Land Gorilla may be on different sides of the fence, both promote faster, more efficient payments.
"We want to protect our customer, the bank," he said, "while they want to protect their customer, the builder."
Traditionally, he added, lenders may forego some of their controls in the construction space in an effort to accelerate the process. For some, that may mean not requiring a lien waiver to process a draw request, not requiring an inspection or not requiring signatures on certain documents. Faries warned that this strategy "erodes" a lender's control, therefore, heightening risk — not to mention, possibly exposing both the lender and builder to compliance risks.
Instead, a more effective way to streamline the construction lending process is to deploy technologies like eSignature capabilities and mobile support for construction companies to request a draw-down on their financing and upload documents, for example. That's all in an effort to add to the volume of high-quality data that lenders can use to mitigate risk.
"If we can show data that supports how risky, or how safe, it is to make a construction loan, money will flood into the market," he said.
Further digitization in the construction space — from drones and mobile document management, to construction-targeting iPhone apps and electronic mortgages — will only add to that data pool, helping to mitigate risk for lenders and solve other problems in the construction financial supply chains. Collaborations with other FinTech firms amplify the effectiveness that FinTech will have on the construction financial supply chain, too, Faries added.
"There are a lot of cool things happening," he said. "This is the most exciting time because innovation is at our finger tips. One person can't solve the big problems. It takes collaboration to do that."