As the name indicates, construction finance is designed primarily for construction firms such as residential and commercial building companies. However, those in related trades – such as electricians, carpenters and roofers – can also benefit from and use this specialist form of borrowing.
Why construction firms need specialist finance products
Any firm that works in the construction industry will already know how challenging borrowing money can be. The industry is a wide and diverse one, and it is difficult for those who do not work in it to understand.
The special contracts and staged payments are especially difficult to fathom, so from a financial point of view most construction firms do not fit neatly into the normal business model. As a result, many financial institutions are more reluctant to lend to them.
For most construction firms, cash flow presents a challenge. A building firm has much of its cash tied up in land and building materials. Often, to complete a project and get a building to the stage where it can be sold and funds released back into the business requires more cash to be borrowed.
In the construction trade, few projects run exactly to plan. Inflation and fluctuating material and labour costs can often leave a building firm short on cash, at least in the short-term. Many of the trades have to wait to be paid, so on paper they are cash rich. However, in reality, because payments lag so much, many builders have very low reserves in their bank accounts. This makes it difficult to buy new materials for the next job.
How construction finance works
Using our specialist construction financing options, a building firm can borrow using the invoices they have raised as collateral for loans. It is a great way of borrowing the cash necessary to bridge the wage gap, or to buy the tools and diesel needed for the next job.
The advantages of construction finance
There are many advantages to using this sector specific way of borrowing money. It is a fast way for a construction company to borrow money.
Importantly, the owner of the construction firm stays in complete control. They decide which invoices to borrow against and how much to borrow against each one. For a few months, a company may not have a cash flow issue or want to invest in any special projects, so it may decide not to borrow any money. However, the moment they need to buy materials for a big job or pay for accommodation for a team working on a remote project, they can borrow against one or two invoices.
Better credit control
Another advantage of borrowing cash against outstanding invoices is improved credit control. The collection of the sum owed on the invoice is the responsibility of the factoring company rather than the construction firm. This is important because, should a customer not pay their invoice on time, the factoring firm chases up outstanding invoices. It is a great way of ensuring that invoices are actually paid.
At Invoice Finance Scotland, we have years of experience of lending to construction firms. This means that we understand the industry, which is why our products are perfect for those working in the construction industry.