Despite the pandemic, the construction industry is growing at its fastest rate since 2014, according to the latest IHS Markit/CIPS Construction Purchasing Managers’ Index (PMI).
This trend is set to continue. Building works for both residential and commercial properties have continued throughout the last 12 months and more are in the pipeline as demand rises.
However, this surge in demand for construction services, alongside factors such as increased shipping costs, has left construction materials, including cement, some electrical components, timber, steel and paints, in short supply.
The Federation of Master Builders says this means some building companies may have to delay projects and others could close entirely.
Fortunately, there are lots of construction finance options out there to help affected firms manage their cash flow and pay suppliers and staff during this busy period.
What is construction finance?
Construction finance is a type of business finance designed for building contractors, sub-contractors and other companies operating in the construction industry.
Lack of funds can lead to delays which ripple down the supply chain. Construction finance provides businesses with the capital they need in order to fund their building projects.
Think of it as a kind of funding bridge: a solution to cover costs from when the building work begins to when the client pays upon completion.
For particularly large projects, such as the building of an entire block of flats or mixed use developments, it can take years for a construction company to get paid.
Without ready cash, companies struggle to buy more materials and pay the workers they need to get the job done – not to mention all the other construction-related expenses.
Flexibility at the core
It’s important for construction lenders to offer flexible repayment options so that firms borrowing funds can keep their construction sites running smoothly.
As there isn’t really such a thing as a set cost for building projects – every project is unique, etc. – the total amount one firm will need to borrow will vary from the next.
That’s why, when it comes to construction finance, there’s no such thing as one-size-fits-all. Finance options are tailored to each construction firm.
4 types of construction finance
Whether you’re in need of a secured loan to cover costs caused by a delay or want to lease a crane for your project, there are a range of construction finance options out there today.
1. Secured loans
When you take out a secured loan, the lender secures the funds against an asset your business owns. This could be a commercial property or a fleet of vehicles. If you don’t want to offer a personal guarantee, a secured loan could be a better option.
Bear in mind that because a secured loan is based on your assets, the loan value will be capped at the value of the business asset you’re using as security.
2. Unsecured loans
If your business doesn’t own many or any assets, an unsecured loan may be a more favorable option (or your only option, for that matter). As the name suggests, with an unsecured loan, you won’t have to offer a business asset as security for the funds.
3. Equipment leasing
In many cases it doesn’t always make sense for a construction company to purchase equipment outright. As well as being too expensive, it might not make sense from a business strategy standpoint.
Instead, many use equipment leasing as an effective way of leasing the machinery they need to complete the project. Equipment ranging for large items like diggers and cranes all the way down to drills can be rented for a set amount each month.
4. Invoice finance
If you rely on customers’ invoice payments for cash flow, you could take out invoice finance to help you cover outstanding project costs until your customers pay you. Invoice finance can be a useful option if you have customers with long payment terms.
It works by the lender advancing you the majority of the funds your debtor owes and then providing you with the rest when the customer pays, minus their own fee.
What can I use construction finance for?
You can use construction finance to fund the areas of your business that need it the most, whether it’s to hire additional staff, purchase more materials or to keep cash flowing through your business. Here are a few examples of what you might use the funds for:
- To pay suppliers/contractors prior to you receiving money from unpaid invoices
- To fund new construction projects
- To purchase more materials or buy/lease equipment
- To hire and pay new staff
- To boost overall cash flow
Funding Options works with a panel of over 120 lenders to support both the cash flow needs and growth of UK construction companies.
If you’re looking to secure funding for a project, see what you could be eligible for today. We’ll match you with the type of construction finance most suited to your goals.