Construction Finance Explained

Construction finance serves as the lifeblood of the UK's bustling construction sector, providing the necessary funds for everything from hospitals and office blocks to houses and factories. It not only fuels the construction of essential infrastructures but permeates every facet of architectural projects, the need for cash spans every phase of a project, from initial groundwork to the smallest details like electric light switches.

‍

Construction Finance Supports Building Projects

Even small construction projects involve an array of components, contractors, and suppliers. Even seemingly minor projects, such as kitchen or bathroom installations, demand meticulous payment coordination. Even a simple home improvement often will involve sourcing materials, accessories, multiple trade people and different payment terms for each. Construction finance emerges as a crucial factor, ensuring a seamless flow of funds from the foundational groundwork, to minute details and finishing touches. Its role is vital in maintaining the rhythm of progress continues and projects get completed as projected.

‍

How Construction Finance Works

There are various forms of funding available to companies operating in the construction sector - including loans and overdrafts. Understanding the mechanics of construction finance is crucial. While traditional financing options exist, construction finance specialises in bridging the gap between invoicing and actual payment. Finance providers extend assistance, often lending a substantial percentage—commonly around 70%—of the invoice value within 24 hours. This swift injection of capital acts as a lifeline, providing essential working capital to sustain construction operations and keep projects moving.

‍

Is This the Right Form of Finance for You?

Construction finance isn't confined to a select few; it becomes invaluable for businesses entrenched in the UK construction industry. Whether navigating contracts, framework agreements, or purchase orders, construction finance becomes a strategic ally for businesses seeking robust cash flow to foster growth. If your business craves financial resilience amid the unique challenges posed by the construction sector, construction finance could be the strategic answer to overcome financial hurdles.

Here are some examples:

• Contractors, or subcontractors, in the UK construction industry.
• Operating within a contract, framework agreement or to a purchase order.
• Requiring a robust cashflow in order to grow.
  

If you want to avoid the hassle associated with late payment of invoices by your customers, or you don’t have the cash to cover your commitments before you get paid, construction finance could be the answer and Spark Finance can help.

Step-by-Step Guide to Construction Finance

Here’s how this method of funding usually operates:

1. You raise your invoice or application for payment and send it to your customer.
2. At the same time, you also send the invoice or application to your funding provider. This is usually by upload via their portal.
3. The agreed percentage of your invoice or application is deposited into your bank account, usually within 24 hours.
4. Your customer pays their invoice or the application. This may be managed through your finance provider, who collects discreetly.
5. You receive the balance of any amount outstanding, minus the fee agreed with the provider.
   

The operational details for construction finance will vary between lenders. Many have an online system that allows you to monitor your finance balance at any time. From raising your invoice to the swift deposit of the agreed percentage into your account, the process is designed for efficiency. This structured framework ensures not only timely access to working capital but also streamlines the financial flow, allowing you to concentrate on the core of your construction projects without the burden of financial uncertainties.

‍

Why is Construction Finance Necessary?

Construction companies usually give credit to their customers, meaning there is typically a 30-day delay between raising the invoice or request for payment and actually getting paid. During these 30 days the construction company will have its own bills to pay, and staff to pay - either weekly or monthly, or both. 

However, in reality most customers take longer than 30 days to pay. The median average, according to Construction News (January 2021) is 41 days across the UK’s 100 largest contractors. Some customers take twice as long as that - more than 80 days - before they pay.

Construction finance exists because of this huge gap between requesting the cash and getting paid. Few businesses in the industry have the cash reserves to bridge this gap by themselves. Construction finance is a commonly used method for raising working capital.

‍

Benefits of Construction Finance‍

The advantages of construction finance extend beyond mere financial support; it becomes the backbone sustaining payments for materials, equipment, and skilled labour. In the fast-paced construction landscape, maintaining project schedules and meeting targets is owed to the flexibility and effectiveness of construction finance. For businesses seeking not just survival but growth, construction finance proves to be an invaluable ally, providing stability and a strategic edge.

The advantages on offer from construction finance include:

• Allows you to keep paying for materials, equipment hire and staff. 
• Helps you to stay on schedule and meet targets.
• Useful for businesses needing working capital to grow.

‍

We Help Businesses Secure Construction Finance

Navigating the complexities of construction finance requires more than a mere understanding of financial systems; it requires a knowledgeable guide. Our team work with a vast range of finance providers well-versed in the nuanced challenges of the construction industry. Whether your business requires an immediate working capital or anticipates future financial needs, our experienced finance professionals are committed to finding the most cost-effective and timely solutions tailored to your circumstances.

If you think construction finance could be right for your business, get in touch with us today.

---------- Sources -----------

https://www.constructionnews.co.uk/financial/cn-payment-100-how-long-do-construction-companies-take-to-pay-14-01-2021/

‍