If you’re taking the first steps toward financing your project, congratulations! This is an exciting time for you, and a crucial growth stage for your business.
Before you finish securing your capital, however, it’s imperative that you determine how to account for your soft costs. That is, expect the unexpected. The soft costs of a project can very much make or break the success of a business, especially during the launch of something big.
Note: If you’re still trying to sort out what options you have available to you, you might want to start here.
What exactly are soft and hard costs?
In the context of managing and financing a commercial project, soft costs are expenses outside of the cut-and-dry hard costs of a project. These are not fixed or necessarily tangible, which can make them more difficult to account for.
While hard costs might be things like:
- The cost to fix equipment
- Construction costs for buildings or facilities
- Materials like cement, wood, steel, technology, or parts
- Various labor costs
Soft costs are things like:
- Fees for filing, legal assistance, licensure, or permits
- Post-project expenses
- Furnishings and supplies
Why does this matter in the financing and capital phase?
Every project is different, but some sources indicate that soft costs can account for up to 25% of your project’s budget. For you, this might be a bit more or less, but the general idea is that you absolutely must be prepared for these things.
How you plan and choose to do this can and should guide the approach you take to obtaining your capital. That is, if you’re planning on financing or leasing equipment directly from vendors, but you don’t have much in the way of liquid capital or cash reserves, how do you plan to cover soft costs as they present themselves? This is how a lot of companies end up stalled and spinning their wheels.
In these cases, it’s often prudent for these businesses to work with single-source, direct lenders like us. While not every commercial finance company works this way, VFI does fund projects 100%. That means accounting ahead of time for projected soft costs (even the unexpected ones), rather than dipping into cash reserves as they happen.
In short, you’ve actually got working capital while you’re taking a project to completion.
How do you account for soft costs ahead of time?
That’s a good question, and there’s really no single, silver bullet of an answer we can give you here. Every project is unique, and should be treated as such, but here are a few basic guidelines:
- If you are a business with a lot of regular cash flow or cash reserves, you’re probably ok to manage soft costs as they come. Just worry about financing for equipment or other hard costs.
- If you’re not sure how to account for your soft costs, or what kinds of expenses to expect, work with a commercial finance company that can help tailor your financing strategy to your industry, your plan, and your needs.
- If soft costs are a potential concern, leasing might not be the best route to take for your project. The chances of getting spread thin are increased, and you’ve got nothing to collateralize your financing against.
As a final note, if you’re looking at the commercial financing options you have available to you, make sure that your funding source will cover everything before you commit. The last thing you want at a crucial junction is to be scrambling for working capital.
We’re happy to help. If you want to discuss your capital strategy, get in touch with us here.