Nailing Construction Finance: What are the Benefits?
Construction firms face some of the biggest challenges around late payments and lengthy payment terms, which are a hinderance to growth, winning new contracts, cash flow management and paying sub-contractors.
How can construction finance work for your business?
Construction finance is every step of the construction journey from ‘putting the spade in the ground’ to completing the final sale to end customers. Financiers have historically found construction finance difficult to finance due to the inherent risks of non-completion, fluctuating house prices, and that there are so many projects that haven’t completed in the past. That said, we can help your construction company break apart individual jobs and contracts within a larger project and help bridge the gaps to help ease working capital management when undertaking a development project.
Construction finance normally covers outstanding billing – these include uncertified applications for payment, staged invoices or sales invoices. These bills are submitted to a specialist lender who would then look to advancing those specific bills or invoices.
Construction finance, particularly in the UK, is an important driver of economic growth, productivity and jobs; read about the Government’s CIS scheme here – an initiative to boost development projects.
What’s the process for getting construction finance?
Construction finance usually occurs in a few steps, normally done online:
- Submit invoices to a construction finance lender
- Financier assesses your creditworthiness, based on various assessments
- Depending on total value of funding requested, lender might ask for further documents e.g. financials, bank statements
- Deposit might be requested
- Loan issued, often around 70% of the total value of the application for payment
How does a construction finance lender assess creditworthiness?
Your business’s credit rating is assessed on numerous factors, including financial history and statements, creditworthiness of key suppliers (e.g. big credible suppliers add value to the application), and assets the business might own (e.g. property).
What are the benefits of construction finance?
Construction finance can help subcontractors of large building projects have cash advanced so that they can hire staff, buy relevant equipment or raw materials to complete their projects.
These can include:
- Builders, building equipment, manual labour
- Cleaners, electricians, plumbers and other specialist workers
- Designers, decorators, interior design contractors
- Layering, plastering, brick work
The main benefits of construction finance can be that funds can be advanced against unpaid invoices within 24 hours.
Construction finance can also be confidential – your customers, clients and existing bank facilities.
Construction finance is mainly aimed at businesses and commercial clients, unlike personal properties, who might not be able to, read how to safely sell your foreclosure home here.
What are the fees of construction finance?
Fees for construction and invoice finance varies (we’ve recently put a piece together on the hidden costs of invoice discounting and factoring here), but in summary, the pricing of construction finance is as follows:
- Service charges (this is the fee for administering the loan) – usually a small percentage of total turnover, typically 0.5%
- Discount charge (essentially interest rate on top of the Bank of England lending rate) – so 0.5% + around 2.5% = 3% of the amount borrowed (as at 14th March 2018)
- Annual fee (to use the facility) – the lowest of the three fees, around 0.5% of the facility limit
It’s important to not just consider the interest rate (discount charge) when looking at finance providers for construction finance, the aggregate of the three or more charges is more important for the business, so make sure you enquire about these when asking for a term sheet.
It’s also a good idea to speak to a knowledgeable construction finance broker such as Trade Finance Global to ensure you’re getting the most appropriate product for your business needs, working quickly on your behalf, and negotiating for you.
Do you need construction finance?
At Trade Finance Global we help developers access project and construction finance.
We’ve also put together the following useful article: 5 tips for construction finance.
To find out more about construction finance read our free extensive guide here.