A Guide to Construction Finance
The construction industry is a major employer in the UK, with around 3.4 million people working in the sector. The industry is also one of the largest contributors to the UK economy, with over £200 billion worth of construction activity taking place annually.
With so many people and businesses involved in the industry, there is a good appetite for lenders to service the construction sector by offering cost effective loan products to boost productivity and investment.
If you are looking to source finance, it is crucial you are aware of what your options are and how you can find the best deal for your business. It is also key to understand where your business sits from a credit point of view and how much appetite any prospective lenders will have to lend to your business.
With so many choices of lenders, loan types and terms, finding the best option can be difficult and time consuming.
As with any product or service, there are specialist loans available for different types of sectors and business types, as lenders aim to cater for common costs and investment types for a variety of market sectors.
Finding the right lender can be a difficult task.
There are so many different types of lenders and brokers that offer finance and finding one that understands the large number of different professionals within this sector and how to serve the different business types and industries is of paramount importance.
As a specialist broker with extensive experience in serving the construction sector, RLA Capital deal with architects, surveyors, builders, plumbers and electricians on a regular basis.
We understand which lenders are looking to lend to these professionals and industries, and we know which ones have a thorough understanding of how these various trades operate as well as their needs and requirements.
By choosing the right lender or broker, you can maximise your chances of being approved for finance.
Common types of construction finance
Construction finance is a broad term that covers a variety of loans, credit facilities and other financial products designed to support the construction industry with developments and projects.
The most common types of construction industry finance are:
- Asset finance
- Vat and Tax Finance
- Bridging Finance
- Cash Flow Finance
- Development Finance
- Invoice Finance
This is a just a small selection of business loan types that can help you grow, expand and push your business to the next level.
Construction Finance Comparison
|Finance Type||Average Terms||Average Lending Amounts||Notes|
|Asset Finance||3 months – 7 years||80-90% of asset value (100% in some cases)||Amounts vary depending on type of asset and credit|
|Vat and Tax Finance||3 months – 1 year||£2,000 minimum (no max but credit dependant)||Amounts vary based upon HMRC bill amount, company profile, credit history and credit worthiness|
|Bridging Finance||3 months – 1 year (can be rolled over after 1 year)||Between 70% & 80% of property/land used as security||Amounts vary depending on type of property/land|
|Cash Flow Finance||3 months – 5 years||£5,000 - £750,000||Amounts vary based upon company profile, credit history and credit worthiness|
|Development Finance||3 months – 5 years||£25,000 minimum||Amounts vary based upon company profile, credit history and credit worthiness|
|Invoice Finance||Rolling contracts||Up to 90% of invoice value||Terms and amounts vary depending on credit worthiness, quality of debtors|
3. Use Free Software
Software development is one of the fastest changing industries on the market, with new developments being released on what seems to be a daily basis.
Software purchases and licenses can take up a large chunk of your budget, and in some industries can cost tens of thousands of pounds.
You can purchase software outright, on a SaaS license or develop in-house. Choosing which option to take can be a dilemma for many business owners;
- Purchase new software that could bring saving but can require staff training and potentially changes to your operating methods.
- Stick with what you know, keep the same software which could potentially cost more in the long run due to inefficiency.
- Develop in house so your software does exactly what you want it to, but do you have the staff expertise and resources to do so?
This is a dilemma that software developers are well aware of, and in response many offer free versions so business owners can "try before you buy" to assess suitability and gauge how easy it is to integrate into the business.
As with any purchase, if you're not sure which one is right for you, check out reviews online and find the one that has the best price/performance ratio for your needs.
Asset Finance for the Construction Industry
Asset Finance is a form of construction finance used by businesses to purchase assets such as plant machinery and equipment. Funds can be used to buy new or pre-owned assets, or can be used to refinance eligible assets you already own.
With asset refinancing, you can have access to the equitable value of the asset being purchased and use it as security for funding – making it ideal for those looking to expand their business without necessarily having to use cash up front.
VAT and Tax Finance for the Construction Industry
VAT and tax finance is another common type of construction finance product and is used to spread the cost of a business’s tax liabilities.
If you are not eligible for a “time to pay arrangement” or do not want to owe HMRC any money, then VAT and tax funding can be a useful option – remove this as don’t want to highlight TTP
Using finance can be a good way to pay your bills on time while minimising the impact on your cash flow and keeping on track with your VAT and tax payments.
Bridging finance for the Construction Industry
Bridging finance is a type of loan which can provide you with short-term financial support to bridge the gap between committing to a job and receiving payment. Usually secured on property or land, you can borrow up to 80% of the total value of the land/property being used as security.
It helps ensure that funds will be available during the interim period, allowing your company to proceed with its projects without interruption. Repayments can be taken out of the advance leaving no monthly debt to service throughout the term of the agreement (usually max 12 months term).
Bridging finance is crucial in encouraging businesses to undertake new projects while ensuring they are adequately funded before commencing work.
Invoice Finance for the Construction Industry
Invoice Finance is a type of business funding used by companies when they need to access cash locked up in unpaid invoices. It usually comes in two forms - invoice factoring or invoice discounting.
Invoice factoring involves the lender taking on responsibility for sending out and collecting payments from customers, while invoice discounting you stay in charge of sending invoices and collecting payments.
There are multiple lenders available offering different invoice finance amounts; most will fund up to 90% of each invoice's total value.
Cash Flow Loans for the Construction Industry
If you're in need of additional cash to help your business cover a short-term financial gap, cash flow loans may be an option.
While cash flow loans are a way to get access to a short-term influx of money for your business needs, they're not meant to be used as a long-term solution.
This form of financing provides timely access to money that can help you manage your current cash flow needs without making a long-term commitment.
We are on hand to help you with any questions or finance applications. Whilst RLA Capital cannot offer financial advice, we can provide various business loans to assist with cash flow. RLA Capital would recommend speaking with your accountant if you are experiencing cash flow problems.