A Guide to Construction Funding

March 5, 2024

Construction Funding comes in many forms. The Alternative Business Funding market is rapidly changing, allowing businesses to grow and expand in a way that suits them. Being on top of your finances is key to the growth of your business, and can aid you in making your vision a reality. The most prevalent form of funding for those within the construction sector is Invoice Finance. 

Invoice Finance

Invoice Finance is an umbrella of funding solutions, with the more common options being Factoring, Confidential Invoice Discounting, CHOCCS and Spot Factoring.

Factoring is the most popular form of Invoice Finance, and is available for all companies within the Construction sector. The purpose behind a Factoring facility is to free-up funds tied up in your invoices rather than waiting out lengthy payment terms. Waiting your payment terms for all of your issued invoices can lead to cash flow issues, and a factoring facility can remove this stress on your finances. A factoring partner can advance you up to 70% of your invoiced value, and the remaining balance minus any fees will be paid to you once your customer fulfils their payment. The amount of credit accessible through this facility will depend on the strength of your business profile and your turnover.

Alongside Factoring, under the umbrella of Invoice Finance, falls Confidential Invoice Discounting. Sometimes known as CID, this type of facility works similarly to Factoring, but is hidden from the customer. When an invoice is raised, there will not be a declaration of a funding partner on a CID facility, whereas on Factoring there will be.  This is beneficial to larger businesses, who do not want to make the client aware that a third party funder is involved in their payment process. 

Spot Factoring works similarly to Factoring except for one key benefit. With a Spot Factoring facility, you have the ability to pick and choose which invoices you would like to gain advanced payments. This can be useful if you have longer payment terms for one of your clients, and you opt to factor those invoices, as opposed to factoring your entire turnover through the facility. On an invoice by invoice basis, Spot Factoring is more expensive than a traditional whole turnover facility, although you will only be factoring a select few invoices across a given period. Our specialist consultants can advise you with which form of Factoring is most financially applicable for you.

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Business Loans

Business Loans are also available to those within the Construction sector. Loans can take shape in multiple forms, tailored to suit and aid your business as it grows. A Business Loan in its most traditional form works to inject working capital into the business, allowing you to have a large amount of funds readily available. This can be used for any business use, such as: purchasing a new asset, or equipment; retaining a high level of working capital, ensuring payments to suppliers & your staff are never missed; or any other expenses your business may make. Traditional Business Loans can either be Secured, or Unsecured, with different criteria and costs being involved in the two.

Unsecured Loans, as you would imagine, are arranged without any security being taken on a property or asset within the business. Unsecured business loans often require a Personal Guarantee from the Company Director/Shareholder. This means that for any reason the business defaults on the loan facility, the director will personally guarantee to pay off the funds. Plenty of lenders offer unsecured loans, with upwards of £100,000 being available. Due to there being no security involved, a strong business profile is necessary to be eligible for a loan of this kind of loan. 

Secured Loans work very similarly to Unsecured Loans. They are the exact same product, except the funds borrowed are secured against a viable asset. This could be property, vehicles, machinery, or any other asset owned by the business shareholder (or director) which has available equity for security to be taken. Secured Loans typically have lower entry criteria, as the security is put in place to cover the lender’s risk of the business defaulting on the facility. Secured Loans are typically taken out against the property, which will lead to a charge being placed on a non-business asset. On the other hand, a facility can be arranged that allows you to free up capital tied up in business assets, such as vehicles, machinery & plant.

The other common form of loan amongst Construction companies is Asset Finance. This form of loan is tailored to your business, specifically to allow for the purchase of an asset. Vehicles, plant, and equipment can be very expensive purchases for some businesses, and a facility could help you acquire the asset needed. Specifically within the Construction sector, plant and vehicles can be large and very costly, but can allow you to access work that could be vital to your future business growth. An Asset Finance facility is perfect for those in need of retaining working capital whilst also acquiring a new asset for the business. It will split the cost of the asset into smaller monthly repayments (subject to interest), rather than paying a lump sum on day one.

Development Finance

Development Finance is used to finance the costs of building brand-new property. These costs include such things as the land costs (which can be up to 70% funded) and the building costs (which can be up to 100% funded). It is important to note that the loan amount cannot exceed 70% of the total gross development value.

These types of facilities can vary largely in the total sum. For larger projects, seven figure sums can be funded for land and building costs. This will work similarly to a Bridging Loan, where a sum of money will be funded to the client, to be spent on developing property. This will then be sold on for a profit, and the capital of the loan will be paid back, plus interest.

For example, if you purchase a plot of land for £200,00 and plan to build 5 houses upon it, a ground-up facility could suit your venture. With an estimated value of £200,000 per property, and a build cost of £100,000 per property, each house built and sold will generate £100,00 profit. The difficulty in this is acquiring the starting funds to build the property. This is where a facility can be put in place and cover this cost. 

£200,000 for the land purchase + £500,000 (£100,000 x 5 houses) would equal a total cost of £700,000 for the build. After sales of £200,000 per property, you would have a total of £1,000,000 (£200,000 x 5 houses), leaving you with a £300,000 profit. 

Development Finance can raise up to 70% of your land purchase, and the total build cost, which would be paid out to you in stages as the build progresses. This will be repaid with interest, but will still leave large profits in the hands of your business. 

Case Studies

Through our expert consultants, and our panel of over 250 lenders, we have acquired plenty of Construction companies the funding facility they have needed.

Jamie Davies
Managing Director

As a founder of multiple businesses, Jamie believes that mindset, discipline and ambition are key drivers for success, both for his businesses and for his clients. 

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Disclaimer: Spark Finance Ltd (Registered office - 18 John Stow House, London, England, EC3A 7JB, Registered Number 10128297) helps UK firms access business finance. Spark is a credit broker, not a lender. Any quotes provided are for information purposes only and subject to status and separate lender terms and conditions. Applicants must be aged 18 and over.  Guarantees and Indemnities may be required.  Spark Finance may receive commission from lenders.  Spark Finance Ltd is authorised and regulated by the Financial Conduct Authority in the UK (FRN 958123).
© Spark Finance Ltd is authorised and regulated by the Financial Conduct Authority (FCA) in the UK. Their reference number is 958123, and you can use that to find them on the FCA register.