Construction finance
How do you get a construction loan as a first-time developer? An inexperienced developer poses a high level of risk, yet there are ways to access construction finance despite this limitation.
What is construction finance?
Financing a construction project
The construction industry is wrought with complexity. When financing a construction project, to ensure it runs as smoothly as possible, you will need a source of finance that can handle contractor delays, price increases, and unexpected expenses.
Capital to fund new projects
Construction finance provides the capital to fund new projects in the construction sector, mostly, but not always, used by construction companies to plug the gap between the completion of work and receiving payment for said work. This type of funding is mainly used to pay subcontractors, purchase materials, and effectively manage working capital in projects where cash flow is difficult to predict.
Different forms of finance
There are several different forms of construction finance, from secured and unsecured business loans to equipment leasing. It is particularly important for small construction businesses in the UK to get the right type of funding at the right time.
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How to negotiate your first development construction loan
Three main areas
When applying for a loan for a new UK construction project, there are three areas where you may have room to negotiate the terms of your loans: interest rate, staged drawdown, and the length of the facility. Given that many building companies will be tied up in lengthy projects that require finance for staged payments, for example, a concrete firm laying poured concrete in an apartment.
Interest rate
The interest rate you secure with a lender will greatly impact the overall profitability of your development project. With a comprehensive business plan that conscientiously demonstrates your ability to deliver on previous projects and a meticulous understanding of the minutiae of the construction costs and timelines, you can secure a low-interest rate. In addition, you can ask for the interest to be “rolled up” so it only becomes payable upon completion of the loan term or settlement, whichever comes first.
Staged drawdown
This type of lending for construction allows you to take money from your facility when you need it. Hence, you won’t have to pay any interest on the balance.
Length of facility
It’s almost guaranteed that there will be project overruns, even if the most experienced team is working on a project with tight scheduling. By extending the time you have to pay back your facility, you will have more flexibility to repay the loan without paying interest penalties for early settlements.
How much can you afford to borrow?
If you're ready to take your business to the next level, use our business loans calculator to get an idea of what you can afford.
Want to understand the cost of your loan?
Use our business loan calculator below to find out how much you can borrow to take your business to the next level.
Calculations are indicative only and intended as a guide only. The figures calculated are not a statement of the actual repayments that will be charged on any actual loan and do not constitute a loan offer.
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Financial product information
Representative example*
• 7.63% APR Representative based on a loan of £50,000 repayable over 24 months.
• Monthly repayment of £2,252.94. The total amount payable is £54,070.56
*Some lenders may apply fees during the application process, please note that these are set and provided by these entities.
Annual Percentage Rates
Rates from 2.75% APR
Repayment period
1 month to 30 years terms
Learn more about construction finance
How to fund a first-time construction project?
Let’s say you have completed or partially completed a new construction project and are awaiting payment. Once you have sent out an invoice, whether it is an uncertified application for payment, a staged invoice, or a sales invoice, a construction finance lender can assess your application.
If the lender is happy with your documentation, they will issue a prepayment within 24 hours — a process that can now be done fully online. The amount available as a prepayment will depend on your credit rating and the value of outstanding billing, but it can be up to 70% of the total value of your payment application. A finance facility connected to a specific invoice will usually be less than if the application is against your entire sales ledger. This process is similar to invoice finance.
It’s worth noting that
You can use the cash for any business purpose
If you apply for a new source of short-term funding against new bills, an additional cash advance will be provided
If your construction contract is complex, i.e it contains contractual debts, retentions, extended payment terms, or project-based transactions it is still possible to secure funding
How to get a construction loan as a first-time developer?
The decision for a lender to issue a building loan comes down to the level of estimated risk. A first-time developer poses a high level of risk, and often lending underwriters will be cautious when they receive an application for building funds from a first-time developer. However, it’s not all doom and gloom for inexperienced developers looking for capital.
First, as a business owner, you will already have a skill set that makes it easy to analyse and plan costs — this will go a long way to convince a lender that you understand the full costs of your development and have the competence to manage cash flow throughout the project.
This lack of understanding is why most first-time developers fail to get finance. Nevertheless, if the loan application is packaged correctly by an expert who understands the construction finance lending market, for example, via a lending platform, the chance of securing a loan for building work can be enhanced significantly.
The reason for this is construction finance is different to a regular loan application, but is more like a comprehensive business plan with project timelines such as:
The acquisition of land/buildings
The cost of building, insurance, marketing, professional fees, and architects
Any potential legal issues and how they might be resolved
Exit plan (sale or lease of the development), incl. how the loan will be repaid
Eligibility for a first-time construction loan
Construction loans in the UK are available to businesses registered with Companies House. Some basic eligibility criteria often include the following.
Company has been trading for the past six months
Monthly turnover of £5,000
For a £20,000 loan, monthly revenue should equal at least £10,000
Can apply for construction loans of up to £500,000. This can be provided on a secured or unsecured basis, depending on your project
If you're a non-homeowner, available loans are much smaller, typically £20,000, but vary from lender to lender
Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.
It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.
Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.
