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Construction Financing

Category: General — Paul Morgan on January 9, 2013

Construction financing can be tricky. Most construction firms have to tie up a lot of money in projects. The materials and labour needed to build even the most basic building are expensive. Once the building is built, it can take a long time to sell – in some cases months or years.

The challenge of construction financing

These issues mean that construction firms are faced with a big challenge and that is cashflow. Finding the money to fund the next project is very difficult indeed. If sales slow, even slightly, it can be difficult to cover labour costs and buy materials for projects in progress.

Getting financing to cover dips in cashflow can be problematic. There is a relatively high level of risk involved in lending to construction firms, making them unattractive to many finance companies. The sums involved are often big and there is a lot that can go wrong, meaning that there is a significant risk of the construction firm not being able to meet loan repayments. If that happens, a financial institution can struggle to get their money back, often there are not many stable assets available against which to secure loans. The value of the assets available for use as collateral is in a constant state of flux. Take land, for example – the value can rise rapidly but it can also fall quickly.

New firms and tradesmen

Unsurprisingly, not too many financial institutions are prepared to lend to construction firms. The newer the firm is, the harder it tends to be to get finance. More or less the only way to raise cash from traditional financial institutions is taking out a mortgage against land or properties owned by the firm. A firm that does not own much is extremely limited in where it can borrow. It is easy to become cash starved.

Jobbing or maintenance builders and tradesmen face the same challenge. They usually do not own any property against which they can borrow. However, a firm that carries out extension or loft conversions still needs to borrow money as part of its construction financing.

Getting finance is a slow process

It can take a long time to secure finance. Most financial institutions carry out lots of checks before lending to construction firms. For a company who needs that money to buy materials to complete an existing project, that presents a big problem.

The solution

Fortunately, there is an alternative solution. Construction financing is available from us for all kinds of construction firms. The service we at Invoice Finance Scotland offer can provide most firms with the money they need, when they need it, and at an affordable price.

'Disclaimer: The information contained in these articles is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.

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