A quick guide to construction finance
Construction companies are driven by the finance available to them. Finding that finance may be especially difficult in an environment where the potential for growth in the construction industry has varied widely between the pessimistic projection of 0.6% in the year ahead by Planning and Building Control Today on the 15th of October 2018, or the more optimistic forecast that appeared in Building magazine on the 19th of February 2019.
Raising construction finance is as critical as in any other economic sector, but there are particular issues associated with the nature of the construction industry. When considering your funding options, therefore, you might want to consult the experts in this area of finance – ourselves here at Peak Business Finance.
Here is a brief guide to some of your construction finance options.
Issues common to the construction industry
Construction companies are relatively capital intensive. Expensive equipment, plant and machinery is essential to most projects, and this represents a significant investment in the assets involved.
Construction finance may be geared to the acquisition and use of such assets through various means, such as:
- the amount that may be raised through such debt finance varies, of course, depending on the lender;
- traditional banks and other lending institutions may offer both secured and secured loans (though due to Brexit uncertainty, there has been a sustained decline in lending from banks in recent months). In some cases more substantial amounts are likely to be available only as loans secured against the company, or personal, assets, which remain at risk in the event of defaulting on the loan repayments;
- secured loans might also extend over tens of years, thus racking up a significant sum in total interest charges over the long-term commitment of such borrowing;
- with the recent emergence of alternative lenders, your options for borrowing – especially by way of unsecured business loans – have noticeably increased;
- the amount you may borrow depends, of course, on the financial standing of your company – simply ask us and we’ll be happy to advise;
- ownership of capital assets may be less important to a construction firm than access to their exclusive use over any given period;
- in that case, either a straight forward lease agreement – an operating lease, at the end of which the equipment, plant or machinery is simply handed back to the lessee; or a finance lease, at the end of which you may exercise the option of completing the purchase of the assets at the end of the leased period – may be the appropriate form of construction finance;
- a common difficulty in the construction industry arises from the time lag between the issue of invoices following the completion of successive stages of a project and your receipt of payment from customers;
- this raises cashflow problems which might be resolved by a further form of construction finance called invoice finance or invoice discounting;
- this is a method by which a cash advance is made by the invoice finance provider – called a “factor” – on the strength of your invoices receivable;
- the factor agrees to pay a percentage of the value of your invoices, and deducts the amount borrowed – plus a commission charge – when your customers pay them;
- either you continue to collect invoices in the usual way and repay the loan, together with the factor’s charges, or the factor collects them, deducts what you owe on the loan, together with the commission charged, and refunds any balance to you.
If you are looking to raise construction finance, therefore, there are a number of options which you might want to explore further with us. Why not get in touch today to see how we can help?
You can request a quote by following this link