5 Hurdles That Small Contractors Face When Starting a Business

By Todd Bryant

If you're a small contractor setting up your business today, you will be facing a variety of difficulties that you might not expect. One is a competitive and somewhat stagnated economic and business environment. Then there are the unique set of challenges that come with familiarizing and aligning yourself with construction industry regulations. Finally, you may need to find financing.

To make a smoother entry into the construction market as an emerging independent contractor, become aware of the following hurdles and how to overcome them:

Hurdle #1: Choosing the Right Business Structure and Developing a Good Strategy

Naturally, this is an important step in the process of starting a business. It can be a major hurdle, however, if you don’t realize the implications of having the right type of business structure. For starters, due to the nature of the construction industry, it is recommended that your company be incorporated in order to acquire limited liability protection for personal assets.

Apart from properly setting up your business structure (for which you should also consult a lawyer), you should start thinking about your business strategy early on. As a newly-founded business, your business strategy can, to a large extent, determine how you will be received by financial institutions where you apply for financing. Ideally, your strategy should cover the long and short term, include a risk management plan, as well as offer detailed explanations of how financing will be used.

Hurdle #2: Getting Licensed and Bonded

You can't be a contractor and not be licensed. Apart from a general business license, you will have to obtain a license which is specifically related to your area of work and issued by the state you are working in.

You can't get a surety bond either, if you're not licensed. And you will need a surety bond, not only because it is required by law but because it is a way to protect your customers. That way, if something goes wrong, you'll have someone to help you out.

Sureties, however, don't hand out bonds that easily. Be prepared to present a bulletproof business plan, proof of financing, and all other relevant documentation of your credentials. A relationship with a surety is something that develops over time, and as a new and independent contractor you’ll need to put your best face forward to make a good first impression.

Hurdle #3: Accessing Financing

To start out as a contractor you will need access to capital -- whether it’s your own, a business line of credit, or some other source of finances. Naturally, without money you can't get things rolling, but it’s also crucial that you understand how to manage the money you have. In this case, and we will get to this shortly, it is best to consult a professional construction CPA.

How you manage finances will determine other stages of your business's development, such as getting licensed and bonded. Good money management is also crucial in order to stay on top of material and labor costs, and eventually buying your own equipment, for example. Make sure to visit Business.USA.gov to find out about ways to access financing as a small business.

Hurdle #4: Managing Cash Flow

Taking care of your finances by yourself certainly is a hurdle most small businesses try to tackle. Yet, it can be both quite frustrating, as well as a source of some serious losses. So, while you may not make use of a CPA right away, you should certainly consider it in the long run.

A good CPA, especially one who is familiar with your industry, ends up being much more than a good accountant. Your CPA can help you manage your cash flow, personal credit score, overhead, and margins. He/she can also suggest the best ways to handle your taxes. Furthermore, a good CPA can also help you increase your surety capacity and receive more surety credit over time.

Hurdle #5: Building a Network of Subcontractors and Securing Contracts

With the skilled worker shortage still looming in full force, it can be really hard for contractors to build a network of reliable and capable subcontractors. As a new and independent contractor you will be faced with this difficulty (often), and there's no easy way out apart from steadily creating and nurturing relationships with subcontractors over time. Not only can it be hard to find skilled workers, but you will also find yourself challenged to secure contracts.

Unfortunately, it can be tough to be an independent contractor, especially if your business is woman or minority-owned. But for every hardship you face down the road, there will always be someone to offer a helping hand and provide advice.