construction financing

Construction work commands heavy capital. Some of the primary expenses include the purchase of raw materials; rent for heavy equipment; wages for labourers; and loads of payment to various service providers and suppliers.

Unfortunately, the industry is fraught with the common issue of late payments from creditors. It could slow down the completion of ongoing work or, worse, compel a construction firm to turn down a new project.

If you seek to dodge waiting on payments to keep the business growing, construction finance can be beneficial for you.

What is construction finance?

You can look at construction finance as a type of invoice finance. It allows you to advance cash you will need to pay for the upfront costs throughout a project. Thus, the amount you borrow will cover the payments you will receive from the clients when they stay paying you.

You can seek construction finance if you’re the contractor or sub-contractor. Moreover, the purpose of the construction loans is to fund for the building of houses, establishments, and facilities, among others. Whether partially or from the ground up, as well as rehabilitation and restoration projects.

How to apply construction finance?

You can make an application by submitting to your chosen lender an outstanding billing. Which can be staged invoices or claims for payment even if your customers haven’t certified them.

In Addition, the lenders also zero in on your overall creditworthiness. They will look through several factors such as your credit profile that require a score of at least 680. Thus, experience and track record as a contractor, your firm’s annual turnover, among others.

If you’re a small-sized construction company with little experience and a far from perfect credit history, you don’t have to feel discouraged from getting a loan as several alternative lenders can still cater to your needs.

How costly is it?

As construction projects are considered relatively risky, you would find lenders setting high interest on construction loans. At least higher than on a traditional mortgage—which you will pay for under a short-term contract, usually for two years. However, if you’re bidding for more time to repay your loans, you can also opt for asset-based financing offering a longer contract life.

Besides the interest rate, other extra fees that go with loans include service charges, discount charges and annual fees.

Lenders can give out as much as 70% of the loan application—can reach as much as £50 million for some—but usually require a downpayment of at least 20% of the borrowed amount.

Meanwhile, some would give you the option to get an advanced sum based on a specific invoice or application for payment or your entire sales record. Lenders’ usually pay out in instalments as the project completes new stages of development.

Pros

Immediate access to cash: Some lenders claim they can transfer funds within 24 hours after an application. Such speed prevents any pause on your operations due to the usual 90 to 120 day-wait payment.

Highly flexible terms: Construction financing is a highly competitive market and, as such, compels lenders to make payment adjustments to capture as many customers as it can

Secret service: Construction finance lenders offer a confidentiality agreement to keep your customers and prospective ones from knowing your building on loan, information that often detracts buyers who opt that a company has its cash flow to prove their financial strength and credibility.

Bad debt protection: With this feature, your lenders can still pay you even if your customers fall into insolvency or cannot repay you, at least any time soon.

Cons

Stringent standards: despite construction loans being high-risk, lenders can still manage to arrange flexible terms you can benefit from, including the quick transfer of funds. In exchange,

however, lenders require much more information and documents and would even conduct a site visit.

Can amount to higher interest rates: this may be the case if you’re a newbie in the construction business. However, as with all high-interest financing, repayment terms last for only a short period which puts pressure on the urgency to retrieve funds from clients before the end of your contract with the lender.

Defaulting on your payment may bar you from tapping financing facilities in the future: failing to pay on time will result in a backlog, making it more difficult for you to move forward to commit to your succeeding payments. Moreover, this would taint your credit management profile and narrow down your horizon of lenders willing to offer you their products and services.