- 23 Oct
Construction Finance Guide
This is our free construction finance guide that will give you access to all the information that you need to know about the use of this type of financial service for businesses.
Construction Finance Guide
Construction finance is funding specifically for businesses that operate within the construction and building sector. The sector can be difficult for traditional invoice finance companies to finance therefore a small group of specialist construction finance companies have emerged.
They are able to offer prepayments against both invoices and applications for payment. According to our research approximately 75% of companies in the sector raise applications for payment instead of invoices. Not all funders will accept these, but we have specialist funders that will even provide finance against uncertified applications for payment.
This guide is to help businesses that are considering using this type of facility, or are already using a service. It will explain how the product works, what the costs are, the benefits and things to watch out for.
This is our own definition:
"Construction finance is the provision of prepaments against applications for payment or invoices raised to debtors that operate within the construction sector".
Other Similar Products
The service fits into a family of financial products called receivables financing or invoice finance. Those umbrella terms describe all the services that provide prepayments against invoices.
A Short Video Explanation
See our 30 second video explanation of this service, below:
Construction Financing Companies
These services are provided by "construction financing companies", of which there are relatively few in the UK.
There are different types of provider. Some are bank owned, others are independent. Even the independents range in size from larger firms down to small companies that have few employees. Also there are some fintech platforms (web based services). Some are members of bodies, such as UK Finance, but not all are.
The type of partner that you choose will tend to be driven by the nature of your situation and what you need. Product operation and service levels will vary between providers, as will the level of funding, not all providers offer all product options.
These are the benefits to using such a service, they will vary slightly depending upon the product variant that you choose to use:
- Improved cash flow. You can use the additional working capital for any purpose, including settling pressing creditors, wages, HMRC or investing in expansion and taking on large orders and projects. You can also approach suppliers for discounts if you can now pay cash for raw materials and supplies.
- Availability of finance to businesses that may not qualify for traditional forms of funding e.g. overdrafts and loans. The nature of these facilities means that the financier is in a safer position (relying on your book debts to recover their advance if required) so that they can take a more liberal view on providing funding.
- Protection against bad debts (optional).
- Cost savings from outsourcing your credit control activity. It can mean that you don't have to employ credit controllers or that you don't have to waste your own time undertaking that task if you are a small business.
- Flexibility to dip in and out of using the service - if you choose a selective facility.
- Electronic access - most providers have some form of electronic access package that allows you to submit invoices, draw down funds and manage your account via an electronic interface. Several offer apps so that you can control your facility via a smart device.
The qualification criteria are specific to each particular funder. There is a great deal more information about how it works and what the criteria are here: Construction Finance.
How It Works
This In very simple terms this is how factoring works:
- You raise your applications for payment or invoices.
- You submit them to the financier, normally electronically.
- The financiers makes available a percentage of the face value of the new invoices.
- You can choose to draw that money down into your bank account.
- The funder sends statements, chasing letters (if required) and contacts debtors if payments are not received.
- The money from the payments repays the prepayments.
- The financier makes available the remaining percentage of the transaction value available less their charges.
See this article: 5 Tips To Get Funded.
The pricing varies depending upon the type of product used and the pricing policy of the provider that you choose.
The amount of funding provided varies again according to the product, the provider and their opinion of the level of risk that your account presents. Typically 70% is a normal headline rate and typical funding percentage.
The actual level of funds advanced may be subject to additional deductions such as debtor credit limits, prime debtor restrictions and disapprovals due to ageing, to name but a few. When choosing a provider it is very important to understand exactly how they will calculate the level of funding and any restrictions that they will apply. This can be a tricky area on which you should seek advice.
There may be a point at which either you, or your provider decide that you want to terminate the facility, this can be for a variety of reasons, and may or may not be subject to a period of notice - depending upon the circumstances. This process will be governed by the facility agreement that you have entered into. For full details about the termination process please see our: Guide To Termination.
Sometimes customers switch between providers, on average this happens once within the life of a client. This may be to achieve a cost saving, raise more money or change between product variations. There are processes in place to facilitate a smooth transfer between different providers.
UK Finance & Complaints Procedure
UK Finance is the trade body responsible for many of the providers within this market. However, not all providers are members. Those that are are subject to a code of conduct that is backed up by an Ombudsman process through which you can escalate complaints. You may wish to check if the providers that you are considering are members. Having said that, the level of complaints has been extremely low.
If you have an issue with your provider, we have extensive guidance on our website about how to deal with complaints about invoice finance.
If you need more help please call Sean on 03330 113622 but we hope you have found what you need in our free construction finance guide.