Construction Finance: Funding Challenges & Solutions

Construction Finance: Funding Challenges & Solutions

Construction is a complex and often difficult industry. Current estimates suggest that the value of the construction industry in Australia is in the region of $42 billion.

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But, if you’re in construction you’ll appreciate the most common challenges to your funding:

Sourcing

Despite the overall value of the industry every project is a risk. Unless you have managed to sell all the apartments or business premises before you start construction it is possible that you will never sell them all.

No matter how unlikely this scenario it is enough to give most banks cold feet. The response is either a solid no to your funding request or excessive high interest rates and security before the funds are available.

The solution is to investigate corporate finance solutions. These are specialist companies which seek to lend you money and help you release equity where possible.

Overrunning

No matter how well you budget there is a good chance that you will need more funds. This can be a huge issue as the initial lender may not be keen to lend any additional funds until they see a return on their investment.

The issue can often arise as a result of unforeseen costs. You must create a budget for the cost of your construction project and then add in extra; to cover the unforeseen. If you do this before you get your construction finance it will decrease the likelihood of you not having enough funds.

Demand

It is difficult to predict the exact amount of demand in the market. This can make many financial institutions nervous as they won’t know whether there will be a market for your finished project.

This can give you cash flow issues during a build and even in your day to day operations.

If you don’t have a good corporate finance company then you’ll need to consider factoring from existing customers to release cash.

Alternatively you can attempt to sell part or all of the building before it is finished; for a discounted price.

The Price

Unless you are building a home for yourself then you are talking about a major amount of capital to successfully complete a construction project.

The risks are high. In order to secure the lending you’ll need you must have a good source of capital to get started with. This will inspire faith n your project and your ability to deliver.

It will also give you a valuable cushion if the market does drop while you are constructing. It may even be enough to allow you to sit tight until the market rebounds.

Obtaining The Finance

You’ll need to evaluate your current business to see if there are any areas which can release capital or even be sold off to create the capital you need.

But to really ensure success in your construction project you need to have a good corporate capital partner. This will ensure you are in the venture together and they want it to succeed as much as you do.

 

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