Long payment terms and late payments are some of the biggest problems facing construction firms. Construction finance is designed to ease these cash flow problems by advancing cash against uncertified applications for payment, staged invoices, or sales invoices.
How does construction finance work?
Construction finance bridges the gap between completed or partially completed work and your customer paying you. Once you have outstanding billing — such as an uncertified application for payment, staged invoice or sales invoice — you submit it to the construction finance lender.
Once the lender is happy with the information you’ve provided, they provide a prepayment (effectively a construction loan), normally within 24 hours. This process often takes place online.
The prepayment varies depending on how creditworthy your customer is and other factors such as your annual turnover, credit history and number of debtors, but can be as much as 70% of the total value of your application for payment. Some facilities give you the option to get an advance against a specific invoice or application for payment, or finance your entire sales ledger.
- You can use the cash for any business purpose
- If you raise new applications for payment or new invoices, new advances are made
It’s possible to get construction finance even if your contract is complex and there are contractual debts, project-based transactions, retentions, or extended payment terms.
Benefits of construction finance
The most obvious benefit of construction finance is that you get advanced funds within hours of raising an uncertified application for payment or staged invoice. This gives you the freedom to pay costs like staff wages and suppliers long before you get paid by the main contractor.
For some construction businesses, it’s possible to set up a confidential facility, so your customers won’t know you’re using construction finance.
Construction finance also puts you in a better working capital position so you can take on bigger jobs without worrying about getting paid for outstanding accounts receivable.
- Funding within 24 hours of raising uncertified applications for payment
- Confidential, if required — your customers don’t know you’re using funding
- Pay wages, bills, labour costs, or suppliers before you get paid by the customer/main contractor
- Improve cashflow and take on new jobs with confidence
How much does construction finance cost?
Generally, the pricing of construction finance will involve:
- Service charge (small % of turnover, for example 0.5%)
- Discount charge (% over BoE base rate, for example 3%)
- Annual fee (small % of the facility limit, for example 0.5%)
The cost of construction loans depends mainly on the size of your business, the nature of your trade, and a few other factors like your credit history and creditworthiness. Some lenders are designed to suit larger firms, and others are better at helping smaller businesses — we work with over 50 lenders, so we’ll find the finance that fits your business best.
Who is eligible for construction finance?
You could be eligible for construction finance if any of the following apply to you:
- You’re the main contractor or subcontractor
- You raise applications for payment (even uncertified)
- You raise invoices for stage payments for incomplete contracts
- You have a CIS UTR number
Even if you’re not eligible for construction finance, you may be able to get a construction loan for more general working capital uses.
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