Construction Business Loans – Construction Business Finance Options Made Easy

Construction Business Loans – Construction Business Finance Options Made Easy

Construction business loans are super crucial to the Australian economy.

According to the Australian Labour Market Information Portal, construction employs approximately 1,153,900 persons (ABS seasonally adjusted data), accounting for 8.9 per cent of the total workforce.

It’s a massive industry and is the third-largest employer Australia-wide.

In the following article, we’ll take a closer look at the various types of loans for construction businesses.

Sparrow Loans: Supporting the construction industry with construction business loans

In 2021, moving forward, the construction industry is booming. All you need to do is take a look around, and you can see cranes dotted all over Sydney’s skyline. Buildings are popping up all over the place. However, obtaining finance to start a commercial construction project can be challenging for some builders and construction companies due to seasonal fluctuations in cash flows. Some months can see negative cash flows, which will affect the ability of these companies to obtain finance for their next build. Many builders have staff on their payroll, rent, significant operating expenses, and monthly fees on equipment loans, putting a massive strain on their cash flow. How are they meant to stay afloat and liquid while waiting to be paid?

Hurdles of obtaining bank construction loans

Many construction businesses can get the cash they need from traditional banks like Westpac, Comm Bank, NAB, etc, which is an issue as they will need to put their homes up as collateral for the loan. Leverage like this is dangerous, especially in the construction industry. Other construction loan options are required to satisfy the vast demand.

Types of construction business loans

There are many challenges in getting a construction business loan, but there are still a few options available such as:

  • A business line of credit
  • Invoice finance
  • Business credit cards
  • Equipment loans
  • Short-term unsecured loans.

A business line of credit

A business line of credit is an excellent option for construction businesses. They can draw on a predetermined amount of money and only pay interest on the money they withdraw. It’s perfect for tying these businesses over seasonal fluctuations in cashflows. It’s very flexible, and you can take as much or little as you require. It’s sort of like a credit card if you can think of it that way.

The Pros of a Business Line of Credit:

i) It improves cash flows. During slow periods, this money will come in handy. 

ii) You only pay interest on the money you use. Plus, if you want to pay the loan off, there may not be any early payment penalties.

iii) Improves business flexibility. You can take advantage of buying cheap equipment that’s on sales with this line of credit. 

iv) Quick approval. You can get your loan within a couple of days.

The Cons of a Business Line of Credit:

i) Extra fees can apply. Watch out for the banks low-interest rates on a line of credit. There are hidden fees associated with these types of loans, so make sure you’re aware of all the terms and conditions when you sign the contract. For example, establishment fees of between 0.5% and 3% are standard. And there are account maintenance fees.

ii) They can be hard to qualify for in some cases. You will need to show business and personal tax returns, bank account information and in some instances n some cases, you may be asked to undergo a yearly review to maintain your credit line.

iii) The amounts are limited. Lines of credit are usually for small amounts of money, so if you want to buy a block of land to redevelop or buy a house at auction that’s ripe for building up a block of units, you’ll need financing through another method.

Invoice finance

Invoice finance is also known as receivables finance and is the ideal option if you have invoiced many clients and need the money now but don’t have the patience to wait. If the economy slows down, outstanding invoices could take up to 120 days to get paid, plus think about the bankruptcies that can happen. How are you going to maintain positive cash flow with all these invoices outstanding to grow your business?

The solution is invoice finance which allows you to unlock the value of your invoices and get hold of that money early, with the collateral being the value of the invoices.

However, you must pay interest – usually between 2% and 5% – on the amount you borrow for the outstanding invoices. 

Getting finance approval for invoice financing is pretty quick as you are using those outstanding invoices as collateral. The lender has to determine the creditworthiness of the creditors and once done, you can receive the funds.

The disadvantage of investor finance is that it generally only applies to large construction companies that send out many invoices and whose creditors have a solid trading history. Also, the interest can be as much as 25% if you calculate this annually. Lastly, if you have creditors with bad trading recond or dodgy credit history, you will not get the financing.

Bank term loan

Bank term loans are your bread and butter typical bank loans we all know. It’s an outstanding construction business loan if you know exactly how much you have to borrow and for how long. These are secured loans, generally against the value of a residential, industrial or commercial property. Interest rates are low for these loans; however, the downside for bank loans is the paperwork involved as it can be extensive. It can take anywhere up to 3 months. So if you need the money quickly, it’s not a viable option, which is where Sparrow Loans can help. We bridge this timing gap and get the cash for you ASAP!

Equipment finance

Suppose you need funds to purchase large capital equipment items for your business, such as earth moving equipment, cars, drilling equipment, cherry pickers, large trucks, or similar; you can obtain construction business finance. This form of equipment finance is also known as a chattel mortgage. According to Wikipedia; Under a typical chattel mortgage, the purchaser borrows funds to purchase a movable personal property (the chattel) from the lender. The lender then secures the loan with a mortgage over the chattel. Legal ownership of the chattel is transferred to the purchaser at the time of purchase, and the mortgage is removed once the loan has been repaid.

The way it works is simple. The lender draws up a three-party hire purchase agreement between the borrower, the equipment seller and the lender. Once you have the money for the equipment, you then pay interest on the money borrowed – simple as that. 

You will have to pay an initial deposit and then a balloon payment at the termination of the loan. So have money set aside for this.

Unsecured business loans

You don’t need any collateral with an unsecured business loan. The paperwork is relatively simple, and you can have the money within a couple of days – depending on if everything goes well. The whole process for getting an unsecured business loan has simplified over the last couple of years due to the number of lenders in the market. These loan periods are short and are less than three or so years.

Making the right decision on your construction business loan

Running any business is challenging. We all know the pressure you’re under in growing it and making the right decisions. The same goes for getting a construction business loan.

Never rush into signing on the dotted line. Please read the fine lines and speak to people about getting the best deal like us here at Sparrow Loans. You have to work out which construction loan is the right fit for your business and have this clearly articulated to you. Making a mistake here could be costly in a few years, especially if you want to repay your loan early; there can be massive penalties.

With Sparrow, however, we make the borrowing process seamless with our no-nonsense approach to talking with our clients. Call us today, and you will see the Sparrow Loans difference.

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.