The challenges and solutions of construction funding

This is branded content.

Whether commercial or residential, a construction project requires significant investment. This is true wherever you may be.

In Australia, the cost to build a 25-story commercial building is estimated at $5500 per square metre in Sydney and at least 1,000 less in other cities like Brisbane and Melbourne. That's a whopping $5.5 million for a 1,000 square metre project.

Because of the amount involved, construction companies need reliable funding to ensure they can finish their projects on time and minimise the risks of delays. But construction financing through traditional means and channels, like banks, can be fraught with complexities.

Luckily, financially challenged companies can approach other construction financing companies for flexible options that don't blow up their current financial debts. Below, you'll find common funding issues and their solutions.

For developers to finish a major project, it costs millions, if not billions. As such, they commonly approach a reliable construction financing provider to address their funding concerns. But raising enough cash is only part of the solution, as most need to repay their obligations after project completion. Worse, because of payment delays, they might be unable to fund the next project.

Solutions

A reliable financing company works with real estate investors to determine the best option. Depending on their current situation, firms can choose from any of the following:

1. Preferred equity

This type of financing enables contractors and investors to access additional capital to fund their current and future transactions. As the name implies, it involves selling a portion of a development asset's preferred equity to financing providers, typically with a fixed coupon rate.

2. Mezzanine financing

This financing option works like a second mortgage on the property with a target interest rate. Mezzanine financing lets loan providers convert the debt into an equity interest in the company if the borrower fails to pay. It's commonly used in boosting project funds or assisting acquisitions and buyouts.

There's so much money going around in the construction sector. For instance, the Australian government is deliberating on a social housing program, which allocates $10 billion to fund 30,000 homes. But large ticket projects can be hard to access for small construction firms.

Property developers often wait for project completion before getting paid. In some cases, they must be able to resell a certain number of units to pay for their obligations. Failure to do so pushes their construction debts to balloon as they wait until their investment returns.

Solution

1. Residual stock financing

If developers cannot resell a certain number of units to cover their investment, they can refinance their payables through residual stock loans. Instead of garnering losses by selling lower-priced units, they can sell some of the stock during a housing market upturn.

The construction debt is refinanced based on the number of unsold units and repaid within a year. As a result, contractors can convert unsold units to raise much-needed funds.

2. Bridging loans

More established construction companies use this financing option, which works like a secured loan, only that the loan amount is released faster and with higher interest. Contractors waiting for client payment can use the loaned amount to earn quick cash to fund their next project or purchase a site.

Construction projects rely on heavy equipment like cranes, compactors, and loaders. However, these pieces carry a high price tag, which can severely dent a construction company's budget. There are a few financing options that can address this problem, though.

Solutions

Conventional and non-conventional construction loan providers offer the following options to qualified businesses:

1. Construction equipment financing

This specialised type of loan enables business owners to purchase new equipment. Note that this secured loan requires the equipment to serve as collateral. This means the lender can seize the asset should the borrower default on the loan.

2. Hire purchase

Hiring a purchase could be the answer if your company doesn't want to add a sizable amount to its construction debts. Instead of lending a lump sum for equipment purchases, businesses can make lower and more regular payments for a certain period until they can repay the financed amount.

Worldwide, the costs of construction materials continue to rise because of logistical and other problems. As a result, property builders must have a reliable cash flow to fund these purchases. Alternatively, they can rely on several financing options for help.

Solutions

Lenders typically offer these solutions to eligible borrowers:

1. Business line of credit

Contractors with high credit scores can get funding for materials and other purchases by obtaining a business line of credit. It works like a credit card, where a provider sets a certain amount of accessible funds.

2. Invoice financing

Invoice financing lets small construction firms borrow additional funds based on their receivables. Under this arrangement, a lender provides as high as 90 per cent of a firm's unpaid invoices and charges interest and other fees. The construction company must repay the financing provider once its client pays.

Concluding thoughts

Through the years, construction loan providers have become more responsive to their client's needs by offering innovative and customised financing solutions. Companies can choose from any of these options to address their funding concerns and avoid repaying hefty interests attributed to conventional loans.

This information is of a general nature only and should not be regarded as specific to any particular situation. Readers are encouraged to seek appropriate professional advice based on their personal circumstances.