13 Oct 2022
Running a successful construction business is no mean feat. Having to pay upfront for materials before you complete the job (and get paid by the client) can prove problematic from a cash flow perspective. Unless you have the ready cash, you might not be able to take on the contract. But construction finance could help.
Construction finance is an umbrella term for finance that is designed for businesses working in the construction industry, including building contractors and subcontractors.
It can help alleviate cash flow issues, enabling you to buy the materials you need to fulfil your client’s brief. Construction finance is usually for the short-term, allowing you to bridge the gap between getting the job done and being paid for the work.
Aside from buying building materials, you can use construction finance to fund a range of business purposes. You could use it to hire additional workers, get new machinery or to keep cash flowing through your business, for instance.
Because every project is different, construction finance tends to be tailored. Here are some examples of the types of building materials you may be looking to purchase using a construction loan (there are many more besides):
Thermal protection and insulations
HVAC (Heating, ventilation and air conditioning)
Electrical systems and equipment
Again, construction finance is an umbrella term and there are different options within it. Secured loans are one such example. When you take out a secured loan, the finance is secured against one of your business assets. Bear in mind that you’ll only borrow up to the amount that your asset is worth.
If you don’t have business assets or don’t want to offer one as security, you have other options. Unsecured loans aren’t secured against a business asset, but you may have to provide a personal guarantee. This means that if your construction firm defaults on a loan repayment, you've guaranteed that you’ll step in and pay.
Invoice finance can help you release cash locked in construction contracts, providing you with the capital you need to cover the cost of materials until your customers pay you. The lender advances you the majority of the funds your debtor owes and pays the rest when your customers pay, minus their own fee.
Building materials aside, you might be looking for an alternative way to get access to construction equipment. After all, it isn’t always viable for firms to buy equipment and machinery outright, and it might not make sense in terms of strategy.
Equipment leasing can help you access the necessary machinery – from diggers and cranes to drills and other small but not insignificant items. You might be able to start using your leased equipment in a matter of days. Leasing can also open up access to higher quality equipment than you’d get if you purchased it outright.
If you want to exit the lease soon after you’ve signed, it can be difficult to get out, so make sure it’s equipment that your company will need for the duration of the lease. So, let’s take a look at the three main types of equipment leasing.
Operating leases are a short-term type of equipment leasing and they usually have a maintenance provision. Because they’re so short term, you could benefit from regular upgrades – the finance provider may even allow you to do this during the finance term.
When you take out a finance lease, you’re effectively renting the machinery for the majority of its useful life. You’ll be taking on most of the risks and rewards of ownership – including maintenance costs – but you’ll never actually own the asset.
At the end of the primary lease period, you have three options:
1. Continue to use the asset in a secondary lease period
2. Sell the asset and keep a share of income from the sale
3. Return the asset to the lessor
Hire purchase is a means for you to buy equipment or machinery by paying for it in instalments. When the instalments have been paid, you’ll be the legal owner. In certain agreements the asset will appear on your balance sheet at the start of the term.
Typically, a 10% deposit and all the VAT is paid upfront.
Funding Options works with over 120 lenders to support the cash flow requirements and growth of UK construction companies. If you’re looking to fund building materials, new equipment or a growing workforce, see what you could be eligible for today.Get started