Construction project finance FAQs
Construction projects are typically characterised by their complexity, the extensive network of overlapping contractors likely to be involved, and the considerable investment of resources that need to be employed before payment is likely to be received for much of the work.
It is why significant effort goes into ways of improving the whole process of construction, including its funding – as illustrated by an article published in The Engineer on the 31st of January 2019.
But there is no getting around the fact that construction project finance represents a necessary but significant initial risk – and one that it is essential you get right.
To help steer your course through the issues likely to be encountered, here are some of the most frequently asked questions on the subject.
Can I take a loan to finance the construction project?
At least some of the finance for your construction project may be raised by borrowing.
Just ask us the question, and we’ll be happy to discuss whatever amount you want to borrow – bearing in mind, of course, that the larger the loan, the more likely any lender is to ask for collateral as security.
So, I need to approach the bank for a business loan?
A bank might be interested in advancing the necessary finance, especially if any loan is secured against the building works themselves.
Be prepared to support any application with a detailed business plan and cash flow projections, however, and you may need to wait several weeks for a decision.
You should also note that recent data shows that British banks are cutting lending to UK construction companies at the most sustained rate for seven years, highlighting the pressure on the sector due to uncertainty around Brexit.
Are there alternative lenders?
Indeed, there are – especially if you are in search of unsecured borrowing.
As banks have tended to draw away from lending to small and medium-sized businesses – and those in the construction industry as we highlighted above – so alternative lenders have stepped into the vacuum. They aim to offer more streamlined application procedures which shorten the time between making your initial enquiry and receiving the funds.
From some lenders, for example, we may be able to get you a decision in principle more or less immediately. Although this needs to be followed by a formal application – during which the financial status of your business and the proposed construction project is assessed – if approval is given, the requested loan may be transferred directly to your company bank account within a matter of days.
Do I have other construction project finance options?
Yes, you do. On a speculative development project, for example, you may be able to attract investment by a business angel or venture capitalist prepared to take a risk on the financial success of the development.
Can I borrow against the income the construction project is expected to generate?
Factoring may be another way of raising construction project finance – depending on the nature and detailed clauses of your building contract.
In this case, a factor advances a loan based on a percentage of the outstanding invoices receivable from your client or customers.
Receipts may continue to be collected by you in the usual way, and the proceeds are used to repay the advance, plus the commission charged by the factor. Alternatively, it may be the factor’s responsibility to collect payment on the invoices and return to you the balance collected, minus the amount initially advanced, with the factor’s commission also deducted.
This is appropriately known as invoice finance.