Despite the pandemic, the construction industry is growing fastest since 2014, according to the latest IHS Markit / CIPS Construction Purchasing Managers’ Index (PMI).
This trend is set to continue. Construction on residential and commercial properties has continued for the past 12 months and more is in the pipeline as demand increases.
However, this surge in demand for construction services, combined with factors such as increased shipping costs, has resulted in a scarcity of building materials such as cement, some electrical components, wood, steel and paint.
The Federation of Master Builders says this means some construction companies may have to postpone projects and others may shut down entirely.
Fortunately, there are many home finance options out there that can help affected businesses manage their cash flow and pay suppliers and employees during this busy time.
What is mortgage lending?
Home finance is a type of corporate finance designed for home builders, subcontractors, and other companies in the construction industry.
Lack of money can lead to delays that are reflected in the supply chain. Construction finance provides companies with the capital they need to finance their construction projects.
Think of it as a kind of funding bridge: a solution to cover costs from the start of construction to payment by the builder after completion.
For particularly large projects, such as building an entire block of flats or mixed uses, it can take years for a construction company to get paid.
Without cash, companies struggle to buy more materials and pay the workers they need to get the job done – not to mention all of the other construction costs.
Focus on flexibility
It is important for construction lenders to offer flexible repayment options so that loan companies can keep their construction sites running smoothly.
Since there are no fixed costs for construction projects – each project is unique, etc. – the total amount one company will have to borrow will differ from the next.
That is why there is no lump sum for mortgage lending. Financing options are tailored to each construction company.
4 types of mortgage lending
Whether you need a secured loan to cover the cost of a delay or you want to lease a crane for your project, there are a number of home finance options available today.
1. Secured Loans
When you take out a secured loan, the lender secures the funds against an asset that belongs to your business. This can be a commercial property or a vehicle fleet. If you don’t want to offer a personal guarantee, a secured loan might be a better option.
Remember, as a secured loan is based on your assets, the credit value is limited to the value of the business assets that you use as collateral.
2. Unsecured loans
If your business doesn’t own many or no assets, an unsecured loan may be the cheaper option (or your only option). As the name suggests, an unsecured loan does not require you to offer business assets as collateral for the funds.
3. Equipment leasing
In many cases, it doesn’t always make sense for a construction company to buy equipment directly. Aside from being too expensive, it may not make sense from a business strategy perspective.
Instead, many use equipment leasing as an effective way to lease the machines they need to complete the project. Equipment from large equipment such as excavators and cranes to drilling machines can be rented for a monthly fixed price.
4. Invoice Financing
If you rely on customer invoice payments for cash flow, you can take out invoice finance to cover outstanding project costs until your customers pay you. Invoice financing can be a viable option if you have customers with long payment terms.
It works by having the lender advance you the majority of the funds your debtor owes, and then provide you with the remainder when the customer pays, minus their own fee.
What can I use mortgage lending for?
You can use home finance to fund the areas of your business that need them most, whether it be to hire additional staff, buy more materials, or keep money flowing through your business. Here are some examples of what you could use the funds for:
- To pay suppliers / contractors before receiving cash from unpaid invoices
- To finance new construction projects
- To purchase additional materials or to purchase / lease equipment
- Hire and pay new employees
- To increase the overall cash flow
Funding Options works with a panel of over 120 lenders to support both the cash flow needs and growth of UK construction companies.
If you’re looking to secure funding for a project, check out what you might be eligible for today. We will find the construction financing for you that best suits your goals.
BUILDING FINANCING – USE
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