The Small Business Times

How Can Construction Finance Help Your Small Business?

What comes to mind when most people think of construction? 

They probably think of a big plot of land, heavy equipment, and machinery, and of course (without a doubt) hefty costs to match. 

Unfortunately, while construction projects can be lucrative, they have a way of being big, and that means money is required to cover the costs – financing is the tricky part, even for a construction company.  

While you may sign a contract with a customer for thousands of pounds, you may find that you don’t have the initial capital available to get the project started. When you consider that the average construction job in the UK comes to around £176,000 (information via Bibby Finance in 2019), it becomes evident why the construction industry relies on financing. 

Imagine how many opportunities you will miss out on if you allow a lack of initial capital to hold you back from taking on a construction project that can genuinely grow your business!

If you operate a business in the construction industry, you’re probably aware that getting finance can be tricky, mainly as the very nature of construction attracts costs. 

However, construction finance is a solution taken up by many leading construction companies. This type of finance covers both invoice and asset finance, and it goes without saying that construction finance can skyrocket your business. 

In general, construction contracts are paid in stages and often require an upfront outlay of capital to pay for the cost of materials and other operating overheads.

Suppose you want to have a competitive edge in an already competitive market. In that case, it’s essential to look for a construction finance company that offers finance finely-tuned to the construction industry. Below, we cover everything you need to know about construction finance

Is Construction Finance the Right Choice for Small Construction Businesses?

As a small construction company owner, you may worry that construction finance is not the best option. While taking on finance will incur a few extra expenses, it may help you take your small business to the next level. 

Many small companies can’t buy equipment outright, so construction finance provides a bridge to help them grow. 

With construction finance, you can spread the cost of your required expenses over a period to ensure that your overheads are covered, and your business isn’t crippled until your customers finally pay. For many construction companies in the UK, construction finance has been a game-changer for their success. 

What is Construction Finance?

There are various types of loans that aim to help construction businesses make the best possible success of their business. 

There are two main loan types well-suited to the construction industry:

Invoice finance

This type of loan allows you to use your existing invoices and contracts to secure a cash loan. This type of loan ensures that your business keeps flowing even when working on large projects and paying out hefty sums.  

Invoice finance works like this:

  1. You do the work. 
  2. You then create an invoice for your customer and send a copy of it to your chosen invoice finance service provider. 
  3. Up to 95% of the invoice total is paid by the finance company – this is usually done by the next business day. 
  4. The customer settles the invoice directly with the invoice finance company. 
  5. The invoice finance company pays over the final 5% of the invoice amount but first deducts the agreed financing fees. 

One of the first things construction business owners worry about is how using a construction invoice finance company will reflect on their business. 

The good news is that you won’t have to worry. Most invoice financing companies are discreet in their dealings and use your business name when contacting clients. 

When using an invoice financing company, you get the money you need quickly, your cash flow remains stable, and you no longer need to dip into your savings or credit card to keep the business running. 

Asset finance

This type of construction finance aims to help business owners get new equipment using hire purchase or leasing. 

This is finance to help you pay for the things required to keep your business running, such as trucks, computers, management software, cranes, scaffolding, etc.

Asset finance can be paid upfront, paid off in bits and pieces, or done on a rental basis. The main options people use hire, purchase and leasing. 

  1. Select the equipment required.
  2. Let the construction finance company know which supplier you want to buy from, and they will purchase the equipment from the seller and hands it over to you. 
  3. You will be required to pay a deposit plus monthly instalments over several months. Once you have completed all the payments, the equipment belongs to you. 

This is an excellent option if you wish to own equipment but don’t have the finances to pay for it outright.

Leasing is paying to use the equipment for a set period. It’s like a rental car that you hire when you are on holiday – there’s a date where you return the item in good order – you never actually own the item. 

Both options mean that you’re liable for less tax. The following steps are involved in leasing:

  • Select the equipment needed and negotiate payment terms. 
  • The lender (construction finance company) buys the equipment.
  • after that, you lease the equipment for a set period with monthly instalments paid to the lender.
  • When the agreed lease period ends, the equipment is returned to the construction finance company.

Final Thoughts

In summary, construction finance offers small construction businesses the following benefits:

  • The ability to say “yes” to projects that have otherwise been too expensive for them to take on.
  • The opportunity to grow their success and capabilities.
  • Access to quality equipment and subcontractors as required.
  • Quick access to finances needed to covering operating expenses. 

If you’re looking into construction finance and want to know if it’s a good investment for your company, the short answer is that it most certainly is!