5 ways to fund your construction project
Financing is one of the biggest challenges affecting construction projects. Not only they are expensive, but they can also go over budget due to unexpected expenses.
The United Kingdom construction sector is continuing to grow even after the post-Brexit downturn. Against this deceptively promising background, you might be considering your own construction project. That means you are more or less straightway stood by the question of funding construction project finance.
It is unusual in the private sector for the customer to provide all the funding for their construction projects, and even in the public sector, the government has always looked to use external financing for its construction projects using the private finance initiative (PFI).
Thus, a preliminary assessment of funding construction options should be carried out when considering whether to continue with your construction project.
This preliminary assessment might consider:
- Budget
- Approvals and consents
- Draw-down facilities
- Loa size and term
- Tax and grants – European trusts and UK trusts and foundations
- End valuation
- Building costs
- Planning risk
- Stage payments
- Collateral or guarantor
- Profit on cost
The following are some of the great sources for funding construction projects:
#1 Mezzanine Finance
When you are considering whether to proceed with your construction project, a valuation of funding options will generally be carried out. Mezzanine finance is among the many funding options available, which especially in times of economic crisis where financial institutions are taking a more risk-adverse stance concerning property development, is an ideal option.
Mezzanine Finance can provide you with a second layer of debt funding to bridge the gap between your actual requirements and the senior debt provided by a bank or fund. In the event of any default, the Mezzanine finance lender will be paid after the senior lender, whereas the equity investors are last in line to receive whatever is left.
Mezzanine Finance is a short-term funding construction finance that comes with many potential profits. Therefore, Mezzanine Finance is a great way to fund your construction project.
#2 Construction and Development Loan
A construction and development loan, like Mezzanine Finance, is a short-term loan that can be used to pay for the cost of your construction project. The loan can be offered for a set time (12 months) to allow adequate construction time. Once the construction process is completed, you will require a new loan to pay off the Construction and Development Loan.
This is often called the ‘end loan.’ That is, you must refinance and move into a new loan that has more conventional financing options for the completed construction project. For example, a fixed rate 30-year mortgage. However, getting a Construction and Development Loan is not that easy.
A lot of confidence needs to be placed in you for undertaking the construction work. The bank is lending you money for something that is to be constructed, with the notion that it will have a definite value when it is completed. However, if things go wrong, if the property value falls, or if you did a poor job, then it could be that the bank has made a poor investment choice and the estate isn’t worth as much as the loan. This is the reason why banks impose strict qualifying requirements for Construction and Development Loans, which include:
- A sizeable down payment – a minimum of 20% and can go as high as 25%
- Building value must be evaluated by an appraiser – the bank must have an appraiser considering the building specifications including the value of the land being constructed on
- The bank needs detailed specifications – you will have to provide details about the materials to be used, floor plans, etc.
- The involvement of a qualified builder
#3 Retained Earnings
Considering that you are in the construction business for a while, you can fund new construction projects using retained earnings. Retained earnings are the net revenue that your construction company has generated, which hasn’t been paid out to shareholders and employees as dividends. Do not confuse retained earnings with owner’s equity.
Your construction company will retain a portion of your revenue for growing your business. There is no better way to nurture and build your business than by funding a construction project.
#4 Unsecured Loan
As a construction business owner, you can apply for an unsecured loan from the bank. The bank will look at your construction company’s history, expenses, revenue, and credit history, among other criteria for determining whether you are a suitable candidate for the loan or not.
Obtaining an unsecured loan offers an incentive to finish your project early. The sooner you complete your construction project, the sooner you get paid. This means you can quickly pay off your loan while minimising the interest rate amount you spend on it.
#5 Equipment Lease Buyback
Another funding construction option you can look for is an equipment lease buyback. An Equipment Lease Buyback incorporates selling construction equipment and tools to a leasing entity who then leases it back to you in return.
The best part about equipment lease buyback is that you get to continue using your construction equipment and earn funding in the process. For example, if you have 100 to 130 horsepower bulldozers costing up to £150,000 apiece, it can provide you considerable revenue for your construction project.
Bottom Line
Funding your construction project has never been this easy. Given your credentials match, you can obtain funding for the construction project of your desired amount with competitive interest.
