Getting a construction project underway involves significant upfront costs, between securing the correct equipment to start the works, to hiring the labour force and purchasing materials. Upfront costs are necessary, as well as further finance to ensure extended timelines are funded.

In particular it’s important for smaller construction companies to manage their cash flow as it can dry up quickly if not properly managed, fortunately,  construction finance is tailored to meet the many unique demands that building projects require. If you are a contractor or are considering starting a construction project, read on, and we’ll discuss some of the most beneficial uses of construction finance for building projects.

Improved Cash Flow Management:

Cash flow management, while mentioned above, is particularly important for smaller firms though still key even for the largest corporations, and construction finance allows for this to be done much more effectively. Because construction projects typically require substantial investments in labour and permits before work can start and any revenue can be generated, it can create a strain on working capital, most significantly if multiple projects are running at once.

Construction finance can bridge this gap by allowing you to provide funds that will cover the initial capital of your project, getting it off the ground, and then any additional ongoing expenses. With access to these resources you can maintain a smooth operation throughout the job’s durations, ensuring that individuals like suppliers or subcontractors are paid on time. It reduces the risk of cash flow interruptions, too, which could delay project progress, but also means you will strengthen your relationship with stakeholders as you can make your payments consistently and on time.

Access to Larger Projects:

If you are a smaller construction firm, or simply find yourself without the upfront means as a contractor or developer, larger projects may seem unsecurable due to financial constraints. In these cases construction finance will allow you to expand your capabilities and pursue higher value contracts. The most significant upfront costs across construction include land acquisition, heavy equipment rental, and specialised professional services, and through construction finance, you can access funding for these factors and scale up your operations. If successful, the access to construction finance can support the growth of your firm, and also enhance your business’s reputation and portfolio, eventually leading to even larger projects and lenders who are more confident in investing in you.

Flexible Payment Structures:

Something else worth noting about construction finance is how flexible it can be in repayment structures, differing considerably to more traditional term loans whereby you access a lump sum and make monthly repayments. Construction finance options are designed to align with your project’s cash flow needs and its overall progress to reduce any unnecessary debt and help manage repayments more efficiently. Some common repayment structures currently on the market are:

• Staged Payments: These are funds that get released in phases as your project reaches pre-agreed upon milestones. It could be anything from when the foundation is completed to when the roofing is installed, and essentially ensures that funding is available when needed without overextending your borrowing.
• Bridging Loans: A bridging loan is temporary finance that can help you cover any immediate costs involved with your project, and once you secure another permanent finance option, or can draw revenue from your project, the facility can be repaid.
• Drawdown Facilities: Through this type of funding you can withdraw funds as and when required for different project purposes, and you’ll only need to pay interest on the amount you use.

Risk Mitigation for Delays and Unexpected Costs:

Even the smallest construction projects can be unpredictable, this is due to the amount of individual parts that make up a successful job from functioning, from management to labour. There are also the factors of potentially bad weather, supply chain obstructions, or other unforeseen site conditions, all running the risk of delays. Construction finance to an extent can alleviate many of these risks, providing your project with a financial safety net and helping to ensure that any challenges don’t derail your project. Contingency funding can also cover unexpected expenses, whether that is for additional material costs or needed labour, and it means you can adapt to changes with a mitigated financial risk, keeping you on schedule.

Preserving Working Capital:

Using construction finance to keep your business’s working capital intact is also an effective way to avoid depleting financial reserves that would otherwise be used to fund other project expenses. As a contractor you can allocate resources to other important areas of the project, too, and that could be day to day operations, marketing, or even staff development if the project is particularly lengthy. Regardless of the needs, preserving your working capital will help to provide a financial cushion, ensuring you remain stable throughout the project’s cycle.

In all, construction finance can be used as a strategic tool that allows you to better manage your costs, take on larger projects, and most importantly, once your project is underway, mitigate risks. By finding a funding solution that is ideal for your project you can ensure operations remain smooth until the work is complete.

Construction finance and traditional business loans can both provide firms with a source of capital, and in some cases a traditional loan may be able to provide a contractor with the finance they need, however in almost all cases, it is in their repayment structures, purposes, and overall terms that make them differ.

Understanding the distinctions between different kinds of construction finance can be useful for contractors who need to cover the various different sectors of a construction project, if you’re interested in the topic, keep reading, and below we’ll expand to get a better understanding of why construction finance is often the preferred choice for construction related needs.

Purpose Specific Loan Uses:

One obvious difference between construction finance and traditional business loans lies in the specificity of their intended purpose, where a traditional term loan can typically be used for almost any business purpose, the terms may not be suitable for a specific kind of construction project. Construction finance on the other hand can be used for niche purposes, and specialised lenders will have facilities that can be used for needs like land acquisition and equipment rentals, materials and labour, or permits and regulatory fees. Specialised lenders will also offer a tailored structure for these financial needs, and as a result, can offer better terms depending on the security of the project.

Payment Structures:

Going further into the different structures of specific loan types, in many cases, the way funds are dispersed for construction finance will be tailored to a project’s timeline, helping you as a contractor or project owner to better manage your funds as the job progresses towards completion. Common payment methods we understand that are currently on the market include milestone based payments, drawdown facilities, and bridging loans. Each has its own value that can help you align the funding you seek with each project’s needs, and will avoid any strains of managing large, upfront sums of cash.

Eligibility Criteria:

You will find the eligibility criteria for construction finance, especially when dealing with niche lenders, is different to traditional lenders such as high street banks. We don’t offer construction finance here at Nucleus, and the list of potential lenders is numerous, so if you are considering it, we can only advise that you speak to your financial advisor. It is also worthwhile approaching different lenders to get an understanding of their terms and conditions, as well as any specific construction loans they offer.

With that said, you can expect to need to present detailed project plans that explain exactly what the uses of your loan will be. This will include things like overall construction timelines, projected budgets, and expected payment milestones, depending on your needs. Evidence of your experience with similar projects may also be beneficial, especially if you’ve been operating in the industry for many years and have a great track record of finishing projects on time. Contracts with clients, subcontractors, or suppliers will also demonstrate that you have a means to pursue your project and there will be no delays once the funds are released.

It is likely that construction finance lenders will also consider factors like the potential profitability of your project, the value of any collateral, be that land or property, and your own ability to manage large scale projects. Each evaluation will be an effort to determine the risk associated with lending.

Repayment Terms:

As touched on, repayment terms in construction facilities are often tied to the stages of a project, or the need to bridge a gap in finances. The generation of revenue from the development may also factor in, depending on the finance, and this flexibility means you can secure a facility that is most aligned with your project type and cash flow.

On the other hand, traditional term loans that involve fixed repayment schedules and begin immediately once you have secured the funding offer no flexibility options that can be structured to your project, making them both a risk to you and your prospective lender.

Sector Expertise and Support:

Because construction finance lenders are specialised to the industry, or should at least be able to prove expertise in it, they will be able to offer unique support that is tailored for building projects. By doing your due diligence and researching prospective lenders you’ll be able to secure funding with a lender that understands the complexities of phased developments and regulatory requirements, providing you with a more reliable funding option.

In most cases, traditional lenders will be unable to offer specialised experience in the construction industry, and if you manage to secure finance with them, would as a result be unable to offer any tailored support if your project starts to struggle and you need to figure out other finance methods to resolve the issues.

Both construction finance and traditional business loans can potentially provide valuable funding to firms, it is because construction finance is purpose built to support specific project needs that makes it far superior to a standard term loan. With specialised eligibility criteria, more tailored and preferable payment structures, as well the industry experience that more niche construction lenders can offer, this niche finance will help ensure smoother operations throughout the construction process and help your project finishes successfully.

Construction finance requires numerous documents that are used to demonstrate the viability of a construction firm’s project and its financial stability to ensure repayments can be made once the finance has been secured.

There will also be basic information such as proof of ID and planning permission before a facility will be considered, and once acquired, lenders will assess any risk to ensure that a project is a good investment. Below, we’ll cover the key types of documentation you can typically expect to present if you are considering approaching a lender for construction finance.

Basic Business Documents:

You will first need to establish to a lender that your business is financially healthy and credible, and to do this you can expect to present a number of financial papers, and through them lenders will assess your risk. These business documents include:

• Financial statements: To begin with, you’ll need to produce your firm’s profit and loss statements (P&Ls), balance sheets, and your cash flow reports to show your current financial health. Ensuring each of these papers is up to date is important, and will demonstrate transparency with your prospective lender.
• Tax returns: Most lenders will want to see business tax returns for the past two or three years, and through them they can gather a clear picture of your business’s income history and compliance.
• Bank statements: You can expect a minimum of three months of recent bank statements to be requested by lenders, though some will request six or more, using them to verify your firm’s cash flow patterns and account stability.
• Credit reports: In the case of credit reports, both business and personal ones may be required, particularly if personal guarantees are needed to secure the loan.

Project Specific Documentation:

Due to the scope of many construction projects, where in some cases entire building estates are being built, you will find certain niche pieces of documentation being requested by lenders, and this will be so they have relevant details surrounding your intended work and the feasibility of the project on a whole. Often these include:

• Project plans: A comprehensive construction plan should include things like timelines, specific design details, and your objectives across the scope of the project. The more detailed you are, the easier your lenders will be able to understand the scale and complexity of your project.
• Budgets: This should include a detailed cost breakdown of your project, covering material costs, labour, any permits, and also contingency plans. Your budgets should be accurate, too, as they will help you convince a prospective lender that your project is financially feasible.
• Milestones and timelines: Tied to your budget, you can detail clear phases and milestones within your project that will reflect where your finance is intended to go, illustrating to your lender how and when the project will progress towards completion.
• Contracts: Any arranged agreements with individuals like clients or suppliers can help demonstrate that you already have some commitment to your project, and the lender can expect payments.

Collateral and Appraisal Information:

If collateral is required for you to secure your construction finance, you should provide thorough and accurate documentation to reassure lenders of their security in the event of a default. In most cases, you expect lenders to ask for the following kinds of collateral:

• Property or land appraisals: Having proof of the current value of the land or property you are intending to develop will be necessary if you are intending to start a project, and is normally conducted by a certified appraiser.
• Ownership proof: Any form of collateral, whether it is machinery or property, will require title deeds or other evidence to conform proof of ownership so in the case of a default the lender can legally claim it.
• Valuation reports: For machinery and equipment offered as collateral, there are also valuation reports attached that correctly assess their value before being used to secure against your loan.

Permits and Regulatory Approvals:

Proof that you have the required permissions to start your project is just as important as proof of your firm’s financial stability, and demonstrating your awareness of compliance with local regulations will be critical before a lender is willing to commit funding to you. It ensures that your project is legally authorised before it begins and minimises any risks for the lender in the case that some documentation is missing. In most cases you can expect to be able to produce zoning and building permits to confirm your project complies with local zoning laws and you have planning permission. Depending on where you intend to build, you may also need environmental impact assessments to ensure your project is in compliance with any legal standards.

Through accurate and thorough documentation, when you apply for your construction finance, you can be sure your prospective lender will have no reason to reject your proposal. Whether it is financial statements, project details, or proof of permissions to actually start the project, meeting the requirements of your lender will drastically improve your chances of approval and provide you with the funding required to complete your construction project.

By assessing the specific needs of the project, and pursuing the correct type of funding, contractors can choose the best construction finance option to ensure the success of a building project. Because of this, it’s important to carefully evaluate lenders based on their expertise and loan terms.

There are a number of things to consider before you approach a lender, and we advise you speak to a financial advisor before committing to any decision, but with that said, if you are interested in securing construction finance, below we’ll break down the things a contractor can consider when finding a loan that will meet their unique needs.

Identify The Specifics:

Before approaching any lenders you should start by understanding exactly what you need funding for. This will be beneficial to both you and your prospective lender, as there will be transparency in your intentions, and the size of the loan that will be involved can be better determined. To clarify your requirements you can start by considering the following:

• Project type: Are you financing a residential development, commercial project, or a more simple renovation? You can also consider that different lenders are more likely to specialise in more specific sector niches.
• Loan amount: Do your due diligence on how much funding your project will require, and consider that everything from materials, to labour, and equipment will need to be calculated.
• Repayment preferences: What will your preferable repayment structure be? Is the job long enough to require milestones? Or do you require a bridging loan to secure a site up front and make the repayment later?
• Project timeline: You should also consider the timeline of your project, and then determine when each section of your job will require funding and how much.

Finding Industry Specialisations:

A majority of lenders will not have expertise in construction finance, which is why it’s important to research lenders who are familiar with the construction industry and its unique challenges. To find industry specialists, start by speaking with your accountant and financial advisor, as they will have knowledge of the lending industry. Understanding important factors like the phased nature of building projects and the necessity of staged payments, as well as the unpredictability of long term project and industry specific risks, means those specialised lenders will offer the best rating related to those facility types. Lenders with industry specific experience can also offer you support as a contractor or developer to help you use your finance to its fullest, keeping your projects on track towards completion.

Evaluate Loan Products and Terms:

When you are choosing your lender and comparing their loan products, you should also compare the terms and conditions within these products to find the best fit for your project and commit to a facility that is most financially beneficial to you. Some of the key factors you can consider are:

• Loan types: Choose a lender that offers products tailored to your needs, whether that is a bridging loan, milestone based finance, equipment leasing, or any other facility that can accommodate your project.
• Interest rates: You should also compare the interest rate between each lender’s loans and try to find the best rate relatable to the funding you seek.
• Repayment flexibility: Next you can assess whether your prospective lender offers repayment terms suited to projected milestones or if they’re revenue based, each of which may offer a reduction in financial strain.
• Loan amount limits: If the lender cannot offer you enough cash to fund your project, you’ll need to find one that can, while considering all of the above factors.

Researching Reputation and Credibility:

Doing research on your prospective lender’s reputation can provide important insights into the reliability before you approach them or commit to a facility. It can also give you an idea of their customer services and will ensure you whether they can deliver on their promises. To start your assessment you should consider the following:

• Read reviews and testimonials: Both online reviews and feedback from other contractors or developers who have worked with the lender can be used to gather information on them, though you should find a big enough pool of information to get a reliable review.
• Look at case studies: Many reputable lenders showcase the successful projects they have financed, and in many cases, if you request it, they will give you the details of the business to find out more. Through these you can get a good idea of how experienced your lender is.
• Ask for recommendations in your industry: By consulting other businesses or associations who have had positive experiences with their own lenders you can get a recommendation for a reliable source of finance.

Finding the right construction finance for your firm can be greatly beneficial to your long term goals and ability to complete a project. It’s why identifying your specific needs and researching the right lender is so important, and also why you should first speak to your financial advisor before you begin, as they will be able to give you invaluable information on where to start and who to trust. By taking the time needed to compare these lenders carefully, you have a much better chance of securing the funding that is right for your project, and overall, increase your chances of successfully completing it on time.