Finance is the determining factor if any project must be successful. In other words, access to finance is important to any construction company. Construction finance is how contractors and subcontractors bridge those long waits for payment for work that’s already complete or still under construction. For this reason, it’s critical to comprehend the numerous construction funding options available. In this article, we’ll go over all you need to know about construction finance options for UK contractors.
What Is the Definition of Construction Finance?
Construction finance is a sort of company financing meant to help contractors, subcontractors, and other construction industry workers. It can also be used to fund new projects, make timely payments to suppliers, buy new construction equipment and machinery, and increase working capital. Construction financing comes in a variety of forms, including secured and unsecured loans, as well as equipment leasing.
How Construction Finance Works
Construction finance is how contractors and subcontractors get paid for a project that is already completed or is still under construction. It’s a catch-all term for the various types of funding available to businesses in the industry.
On the other hand, it can take the form of a straightforward loan that allows you to purchase the necessary equipment, labour, or materials to complete a job. This is referred to as asset financing. This, like any other loan, would be repaid over time with added interest, of course.
Construction finance helps you bridge the gap between completing or partially completing a project and receiving payment from your client. You submit any overdue invoicing to the construction financing lender, such as an application for payment, or sales invoice.
When the lender is comfortable with the facts you’ve provided, they’ll give you a prepayment (basically a construction loan) within 24 hours. This procedure is frequently carried out online.
Benefits of Construction Finance
The most obvious advantage of project construction finance is that you can acquire advance funds within hours of submitting an uncertified payment application. This allows you to pay expenses such as employee salary and suppliers before the principal contractor pays you.
Furthermore, it’s feasible to set up a confidential facility for some construction enterprises, so your clients won’t know you’re using construction finance to fund the project. Construction finance also improves your working capital situation, allowing you to take on a larger project without worrying about unpaid accounts receivable.
Secondly, construction finance protects you from bad debt. If it’s not cash flow, you can bet it’s bad debt that’s killing the UK’s construction industry. Your company may have firsthand knowledge of it, with clients going bankrupt after owing you money for work and ultimately being unable to pay.
It’s not fun – but there is an alternative.
Many construction finance companies provide bad debt protection. It’s a premium, add-on service that comes at an additional cost, but if your clients have a less-than-perfect credit history (or a history of insolvency), it’ll be well worth the money.
Bad debt protection essentially releases you from any liability for the money owed to you by a client if that client becomes insolvent. Instead, the construction finance company funding your invoices takes on this responsibility, which means you won’t be out of pocket, even if your clients are.
Construction Project Finance UK
Any construction company must be able to obtain financing. As a result, it’s critical to understand the various types of lenders available. Major construction projects necessitate significant funding for everything from heavy equipment to crew wages to insurance.
What are some of the most common construction financing sources? In the United Kingdom, there are a few common sources of project construction finance:
- Hitachi Capital
- Nucleus Commercial Finance
- Bibby Financial Services
- Ultimate Finance
- Aldermore,
- Paragon
Notwithstanding, It is critical to understand that there is no one-size-fits-all project construction finance solution for UK businesses. Therefore, whatever method you choose to finance your UK construction project, you must receive funding as soon as possible so that you can begin.
Most commercial construction loans are in layers, with the borrower able to draw on a schedule as specific stages of the project are completed, so you must have at least enough finance in place to begin construction.
#1. Nucleus
This commercial financing solution is famous for funding larger projects. For example, a business project with an annual turnover of £1 million, and the invoice finance from £100,000-£50million.
Nucleus, in its own words, is “particularly best to those businesses requiring £100,000 to £50 million funding.” While this precludes Nucleus from financing smaller jobs and assets, you can be confident that it is an ideal partner for the more ambitious projects on your company’s horizon.
According to customer reviews, working with Nucleus Commercial Finance has been one of the most enjoyable experiences, says Kris in January 2020. They know what they’re talking about, know what’s best for you, and are completely honest and transparent.
Pros:
- A trusthworthy account manager is included, and confidential invoice discounting is an option.
Cons:
- To be eligible, you must have yearly revenue of at least £1 million.
#2. Hitachi Capital
Hitachi Capital is a versatile choice for funding your next large UK construction project, offering both invoice and asset financing options. It also takes a refreshingly straightforward approach – even hidden fees are clearly labelled – and its cost calculator allows you to see exactly what your repayments will look like over time.
Best known for the transparency in their rates, Hitachi features include:
- Minimum turnover= £50,000 (factoring), £250,000 (discounting)
- Allow up to 90% of the value of your invoice.
- Annual costs are estimated to start at £1,751.
- Asset financing is available in amounts ranging from £10,000 to £500,000.
- And lastly, the representative asset finance APR starts at 5.9 %
According to one of the feedback by a customer, Kate, obviously satisfied, recommended the services of Hitachi Capital.
Pros
- Repayment terms of up to five years are available.
- Funds are available as soon as 24 hours after approval, and there is a 6-month trial period available for its invoice finance product, followed by a rolling contract.
- Excellent customer feedback
Cons
- Before you can receive funding for your asset, you must pay a £175 document fee and an up-front deposit.
#3. Bibby’s Financial Service
Bibby is the third finance option in the UK to consider for project construction funding. They are famous for flexible contracts and fast payouts. As construction finance experts, Bibby’s reputation precedes it, as evidenced by its ‘Excellent’ Trustpilot rating.
Furthermore, Bibby’s invoice and asset finance allow you to focus on what matters most – the project – with quick payouts, flexible contracts, and a simple application process. Bibby also collaborates with Gateley Vinden, a construction specialist, to provide ancillary services such as dispute resolution, contract reviews, and advisory support.
With Bibby’s financial service, funds are ready within 24 hours of invoice upload with 90% of your invoice’s value.
Pros
- An easy-to-use, 24-hour online portal for tracking the status of your funding application.
- There is debt protection available.
- Customer approval ratings are high across the board.
Cons
- One of the more expensive invoice financing options available.
- There is little fee transparency.
#. 4 Paragon
Paragon is easy to deal with as their services are based on face to face which is important to customers. Their asset finance facility specializes in connecting you to your next piece of equipment, whether it’s a loading shovel loan or bulldozer bridging finance.
You can be confident that your company’s finances will remain firmly in your own hands because Paragon offers everything from asset refinancing and commercial loans to hire purchase and operating leases.
Pros
- There is debt protection available.
- Simple fee structure with no surprises
Cons
- Online customer feedback is negative.
#5. Aldermore
This funding service is best known for providing excellent customer service. They release up to 70% of the customer’s invoice value, and their services are available to businesses with a minimum annual turnover of £250,000.
Aldermore’s no-frills, no-nonsense construction finance doesn’t get much attention. However, with a transparent fee structure (if not exact rates), a dedicated relationship manager, and excellent customer service, it’s a dependable funding option for businesses with sufficient turnover.
Pros
- There is debt protection available.
- Confidential service is available.
- Aldermore’s website has a wealth of support and informational resources.
Cons
- Its cash advance of 70% is lower than that of the other construction finance providers listed here.
#6. SME Loans
SME is best known for financing small construction businesses. They release up to 95% of invoice funds to businesses with a yearly turnover of £60,000 or less. Another intriguing aspect of this UK construction finance provider is that they will match you with a construction finance provider who meets your project requirements.
So, if you’ve looked into several banks and independent construction companies and discovered they’re not for you, don’t give up – there is another option. It’s known as working with a credit broker, and SME Loans is one of them. Simply provide SME Loans with some information about your company, and they will match you with finance providers who meet your needs.
Pros
- Repayment terms range from one to five years.
- Funds are made available within 24 hours.
- Make a loan at a predetermined interest rate.
Cons
- SME Loans is a broker, which means it does not provide funding directly to you.
#7. Ultimate Finance
Finally, but not least of construction funding option in the UK to seek finance for your project is Ultimate Finance. It’s a fantastic company that always goes above and beyond. You get professional, friendly service from Ultimate Finance, and they keep you updated every step of the way.
Best known for invoice finance, they can access up to £1.5milloin to businesses with £600,000 annual turnover. Yes, it’s similar to Nucleus in that it’s not appropriate for smaller jobs or financing minor assets. Rather, Ultimate Finance is better suited to larger projects that will make you money and get you noticed.
Pros
- Excellent customer feedback
- Phone support is adequate.
- Funds are expected within one week, which is quick…
Cons
- …although, not as quickly as the 24 hours promised by several of the other providers listed here.
- There are setup and service fees
Summary
To summarize, if you want to take on a major project but lack the finance to proceed, consider pursuing anyone of the above construction finance options available to UK contractors. Additionally, you may be able to take advantage of multiple funding options, depending on the type of project you have at hand.
Related Articles
- Funding For Property Development: Tips to Finance Property Development
- How to Become a Car Trader: Detailed Guide
- Starting A Construction Company UK: Step By Step Guide
- Property Development Finance: Bridging Finance For Property Development
- HOW TO FINANCE PROPERTY DEVELOPMENT: Top Tips
FAQ’s On Contruction Finance
How do you finance a construction project
Construction loans from a bank or other financial institution are the two most common options. A home equity line of credit, or HELOC, once again. However, there are other options, such as crowdfunding, finding a money partner, or utilizing tax credits.
What are the sources of finance construction
Primarily, the funding sources are equity, debt, and government grants. Financing from these alternative sources has significant implications for the overall cost of the project, cash flow, ultimate liability, and claims to project income and assets
Can you buy a house with a construction loan
Many people prefer to build their own dream home rather than buy an existing one—but a traditional mortgage will not help you achieve that goal. Construction finance can be used to finance the construction of a home, with only interest typically being paid during the construction period.
What is a Construction loan
Before getting long-term financing, the builder or home buyer takes out a construction loan to pay the project’s costs. Construction loans offer higher interest rates than regular mortgage loans since they are deemed to be riskier.
Do you have to pay for interest on a Construction loan?
On a construction loan, the borrower may only need to make interest payments while the project is still in progress. However, some construction loans may require the entire sum by the end of the project.
