What is Construction Finance?
Companies in the construction sector face a particular challenge. Construction projects involve a significant outlay for equipment, materials and labour, but payment doesn’t come until the build is finished – and it won’t necessarily arrive on time. Construction finance helps companies bridge that gap, relieving pressure on cash flow and allowing for timely completion without cutting corners.
How Does Construction Finance Work?
Here’s a quick overview:
There are several ways to fund a project, equipment or acquisition using construction financing. These include:
Business loans:
Secured loans require you to use an asset as collateral to ensure that the amount of the loan can be reclaimed even if you default on payments. Because of this security, interest is generally lower than on unsecured loans. These don’t require collateral, but you may have to provide a personal guarantee.
Building and construction loans:
These loans are intended to fund a specific project. The amount, interest and schedule will depend on the scale of the project.
Asset finance:
This allows you to acquire costly construction equipment without making a substantial upfront payment. Lease and hire purchase plans involve affordable monthly payments over a period of up to five years. Fixed interest and VAT are included in these payments.
Refinancing:
If you already own expensive equipment or vehicles, you can release some equity by selling the assets to a lender and repaying them in monthly installments. This can provide bridging finance or a quick cash injection to help defray costs.
Invoice finance:
Here, you assign unpaid invoices and payment applications to the lender and receive a cash advance between 70% and 90% of the outstanding amount. This is usually released quickly, within 48 hours. The client payment goes directly to the lender, who subtracts their fee and releases the remaining amount to you.
What is the difference between a building loan and a construction loan?
Building Loans
Building loans help finance a specific construction project, usually on a smaller scale, such as home renovations, extensions and loft conversions. The amount of the loan is calculated using the cost of the build, not the value of the finished property. Building loans typically have a one-year term and a higher interest rate than longer-term loans. The full amount is sometimes paid upfront.
Construction Loans
Construction loans are intended for large-scale construction projects such as new-build residential or commercial properties. The amount is generally larger and is released in stages, to correspond with the different phases of the build. Repayment terms are longer and interest is generally lower than smaller building loans.
How can I get approved for construction finance?
Construction finance is unique because of the challenges presented by the sector. Both time and expense are frequently much higher than the initial estimate. Weather, supply chain issues, legal problems and labour shortages can all delay a project or even stop it altogether.
If you’re applying for a loan, the lender will want to see that you have a realistic timeline and business plan, with a time and cost margin built in. You should disclose any potential legal obstacles and show that you have an exit plan if things go wrong.
Talk to us about Construction Finance
Access structured funding to support residential or commercial build projects.
Whether you’re developing new properties, undertaking major refurbishments or managing staged build costs, construction finance can provide drawdowns aligned to your project timeline and budget.