5 tips for construction finance
Construction and project finance can be hugely complex for all parties involved – developers, construction companies, architects, and even brokers, who are often faced with challenging payment gaps and working capital constraints when dealing with major projects. Any successful developer will know that it is always important to plan finances carefully and allow for contingency when undertaking a project.
What are the some of the challenges?
- the bank will often require committed finance from investors, for around 75% of the build and development cost of a property
- Builders and construction companies will often require tiered or upfront project for any work they do
- Construction companies can only invoice developers after the project has been completed, and with 30-90 day payment terms, they might not get paid until the project is completed
- Construction companies need to pay workers and suppliers of raw materials upfront
How can project finance help?
There are several financial institutions and alternative funders that offer project and construction finance – both for commercial mortgages, commercial property projects, construction projects, and development.
The finance structures are often tricky to work out, given the complex nature and variety of construction finance.
Here are some tips for developers and construction companies when it comes to development finance and building projects:
1 – Know where your sources of funding are coming from
Be sure that your investors and their assets are certain – e.g., they have tangible assets such as cash, significant property to act as a deposit or collateral, or a series of mortgage approved investors
2 – Seek legal and financial advice
Always speak to a solicitor and engage with a mortgage broker to secure property finance.
3 – Be cautious about exchange rate volatility
Often in the case of project and development projects, investors and sources of funding might be from overseas. It’s advisable to mitigate foreign currency volatility, due to the nature of fluctuating currency rates. Businesses and parties can use options and various contracts from foreign currency providers to mitigate this risk and protect against volatility between currencies.
4 – Consider using a broker to get project or development finance
It’s always a good idea to use a broker to secure the most suitable financial product for your business – they’ll often be able to get you a good rate given their relationships with banks and financial institutions, as well as an understanding of how the financing works, so they can recommend you the most appropriate financial product. When accessing construction finance, it’s worth putting together a portfolio of successful past projects so that you can demonstrate credibility, a healthy balance sheet, and experience to a bank or lender.
It’s also a good idea to speak to your accountant to make sure they have up to date cash flow statements, balance sheets and you have financial forecasts available to show the bank so that they are comfortable with your companies ability to repay anything they lend to you.
5 – Protect yourself first
When it comes to development projects or construction, often these parties hold most of the financial risk if things don’t go to plan. Seek relevant insurance, plan accordingly for all possible scenarios, and ensure you’re company is protected against financial losses.
Do you need construction finance?
At Trade Finance Global we help developers access project and construction finance.
To find out more about construction finance read our free extensive guide here.