Due to the large upfront costs of construction and the time to complete a building, most companies and their contractors have to turn to specialist construction finance to fund their projects. With this funding, they are able to pay for materials, employ contractors and all the associated works. In order to ensure that companies are paid as they do the work, rather than all at the end, there is a system of staged payments to the contractors provided that certain milestones and phases in the construction are carried out correctly.
There are a number of different types of construction contracts that provide a legal binding agreement, for both the client (owner of the site, building or project for example) and the builder, that the job will receive the specific amount of compensation and how payment will be made.
These major contract types can have many variations and can be customized to meet the specific needs of the job. Usually, payment is made to the builder or contractor in stages based upon certain milestones being achieved.
How does construction finance work?
Effectively, once you have completed a certain stage of the construction that has been set out in the contract, and the work is satisfactory, then you can raise an invoice or an application for payment and submit it to the lender. They may have their own quantity surveyors that will assess the quality of the work and so approve the forwarding of funds. This can be as much as 70% of the amount requested. This works a bit like factoring in that you will get immediate payment for most of the work immediately. This should help you fund the next stage of the construction project without having to wait for payment from the client. It is important to note that the amount that you will be advanced depends on many factors such as the creditworthiness of you, the client, and the type of project
So you have a contract, Good! Your company has a client GOOD! But you have insufficient funding to meet the milestones? NOT GOOD?!
Whilst growth finance products could allow the introduction of loans from banks or peer to peer lenders to be used for working capital in the business, it may also make sense to look at the introduction of very specific types of finance called construction finance.
When you work in construction, getting such finance can be tough to obtain. You may be funding wages before receipts are available from the contract, whilst trying to buy new materials or labour, with a small overdraft facility or sourcing competitive invoice finance solutions.
These issues, coupled with difficult clients and often poor work planning/productivity on-site can cause cash flow headaches for any small company working in the sector.
Specific new construction finance products have been designed to address this problem.
Funders provide innovative funding solutions, based on deep knowledge of YOUR sector. Solutions are practical and scalable.
Typically, a construction finance product is a bit like Invoice Finance . They provide pre-payments against applications, stage payments and milestones for sub-contractors in construction or other industries, where contracts with their customers have been a barrier to finance from traditional lenders like the high street banks.
Drawdowns (cash) are advanced at an agreed percentage of the outstanding invoice / application value, taking into account the longer contract terms. It is typically targeted at businesses with less than £2 million . Fees are fixed to begin and are generally lower than unsecured ST loans.
The products can be confidential – the client need not know. Some providers have their own quantity surveyors too. They fully understand the contracts and all the tricks of the construction trade! Having the finance and the technical knowledge can greatly enhance your business and its cashflow.
What Else Do Construction Funders Offer?
Some providers also offer asset finance . This can be used to fund trucks, vans, diggers and other equipment. Overdrafts and property loans can also be used in a blend of flexible finance products.
Talk to our team today to find out if your company is eligible.
Advantages of Construction Finance
- Smooth out cashflow holes, makes planning easier
- Ensure adequate material labour on site – avoiding inefficiencies
- Meet payroll and all supplier payments on time
- Improved credit rating
- Avoid raising equity capital and diluting existing shareholder ownership
- Happier clients and customers
Disadvantages of Construction Finance Products
- Only suitable for business to business construction projects (cannot fund against small home owners work)
- Securities required in form of debenture and over property
- Personal guarantees’ required
- More scrutiny by lender
- Security is usually in the form of a debenture over the company’s assets
Lots of work to tender for? Lots of quotes out there but worried if they all confirm that your bank will not be able to fund your working capital needs?
Talk to CFO today to establish if your company is capable of being refinanced with these innovative funding products.
There is no obligation when you speak to CFO and no cost to find out more.
See our links to Construction finance providers by entering your funding requirements into the search engine