Construction Finance Explained

April 13, 2022
Jamie Davies

Construction finance is all about the cash that underpins almost everything being built across the UK. It helps fund the building of hospitals, office blocks, houses and factories. 

Construction finance is used to pay for every aspect of the project, from initial groundwork to the steel frames, brickwork and plumbing, right down to the electric light switches and socket panels.

Even a small building project involves many different components, contractors, and suppliers. All of these need paying to keep the work going, which is where construction finance comes into play.

Construction finance supports building projects

Even small construction projects, such as installing a new kitchen or bathroom, relies on cash to pay for supplies and labour. The customer typically pays in a few instalments of significant amounts, to the main contractor. They in turn pay subcontractors.

However, the nature of construction means that there are multiple suppliers to be paid, not all of which can be predicted at the start of a project. Unexpected situations and events occur, meaning plans need to be changed at short notice and resources redeployed.

For this to happen, a solid stream of working capital is required. This is where construction finance plays its part - giving you access to cash when you need it.

How construction finance works

There are various forms of funding available to companies operating in the construction sector - including loans and overdrafts. However, construction finance usually refers to the lending that fills the gap between raising an invoice or an application for payment on the customer and getting paid.

The finance provider lends an amount based on the value of the invoice or application for payment, usually from around 70% of the invoice value and upwards. This cash could be deposited within 24 hours of the request being made, providing valuable working capital.

When, in due course, the customer makes payment, the balance is passed to your business, minus the appropriate finance fees. 

It’s a form of invoice finance, or factoring, designed specifically for the construction industry.

Is this the right form of finance for you?

Construction finance provides valuable working capital to businesses that are:

  • 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.

Flexible, affordable finance for your business

Get the finance your business needs for growth, to fund opportunities and to overcome cashflow shortfalls.

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.

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 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.

Construction finance is a flexible, short-term finance facility that allows you to fulfil your obligations, while avoiding the uncertainty that comes with tight cashflow.

We help businesses secure construction finance

While working capital might look the same, whatever line of business you are in, construction finance providers understand the variables and challenges that come with working in that industry.

The nature of construction means it has unique issues and working practices. We work with a wide range of finance providers who understand these issues. Whatever circumstances your business encounters, it’s likely that our providers have already helped others through something similar.

Our clients approach us either when they need additional working capital for their projects, or they anticipate they may have a need in the future. 

When you come to us, we assess your situation and match you with the most appropriate finance providers. Our aim is to help you find the most cost-effective and timely solution.

Our team of experienced finance professionals have helped many other businesses like yours.

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/

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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