4 of the best ways to fund construction

Funding construction projects in the UK was never a simple enterprise and is getting harder. The inspection from the lenders has intensified over the years, making it more time-consuming and trickier than ever for construction projects to secure the funding they need to grow. According to the Bank of England, lending to construction projects has fallen by 30% in the last couple of years. High street banks are often reluctant to co-operate or do not understand the constraints in the construction industry work. But there is no need to worry. All is not lost, and there are some really competitively priced alternatives to the high street banks.  

The following are the sources of funding construction projects:

#1 Construction and Development Loans

The construction and development loans in the UK are typically short-term loans that can be used to pay for the cost of architecture, such as a private home or building. Construction loans are offered for a set term – say a year, to allow sufficient building time. Once the construction process is completed, you will need a new loan to repay the construction loan. This is also known as the ‘end loan.’ 
Hence, you need to refinance and enter into a new loan that has a more conventional financing option for your completed building like a 30-year fixed rate mortgage.

What are the eligibility requirements for a construction loan?

Mortgage lenders and banks are often cautious of allotting construction loans for several reasons. For starters, a lot of conviction requires to be put in the contractor commencing the construction project. The mortgage lender or the bank is lending money with the assumption that the building that is to be constructed will have an absolute value when it is finished.
For instance, if things go sideways – if property values fall or the builder does a poor job, then it could possibly turn out that the mortgage lender has made a poor investment choice and that the building isn’t worth as much as the loan.
Therefore, to protect themselves from such scenarios, banks and mortgage lenders impose strict qualifying requirements for a construction loan. This may include the following criteria:  

-          A large down payment
Although 20% of the total loan amount is required as down payment, some lenders and banks may charge as high as 25%. This is done for the lender’s assurance that you have financed in the project and will not simply abandon the project if things go south. This also guards the lender in the event the building doesn’t turn out as much as expected. If you have a positive credit rating, then you can easily qualify for the construction loan. However, the lender or the bank will require information about your income as well.

-          Building value is estimated by an appraiser
While it is difficult to appraise something that doesn’t even exist, the bank appoints an appraiser to evaluate the value of the land and building specifications before funding construction project. These estimations are then compared to other similar construction projects with same size, features, and locations, with an evaluated value being determined from these.

-          The lender needs detailed specifications
The lender or the bank will require details about the materials used and the floor plans. Hence, you need to put together a comprehensive list of building specifications – everything from the type of insulation to be used to the ceiling heights of the building.

-          The involvement of a qualified builder
A builder, with a general contractor licence and an established reputation for quality construction work, is called a qualified builder.

With a construction loan, interest must be paid on the money borrowed. The interest rates vary from lender to lender and according to the market conditions.
Once you have been qualified for a construction loan, the bank will start paying the money they agreed upon. A schedule of draws is set up instead of providing all the money upfront.

#2 Mezzanine Finance

Mezzanine finance can be especially helpful during economic hardships when lenders may take a more risk-averse stance in relation to funding construction project. Mezzanine finance, unlike your construction loan, provides a second layer of funding to bridge the gap between the primary debt and your actual requirements.
It works in a way that the mezzanine lender will only get paid after you have paid the debt of the senior lender, such as the bank. Hence, mezzanine lenders are at higher risk than banks or mortgage lenders.

#3 Private Developer Scheme

PDC or private developer scheme is a form of public procurement in which construction of a building project is commenced and funded by a private developer. However, the construction asset is occupied the government who pays the rent for a certain term to the developer under a leasehold agreement. PDS is a form of collaborating where public land is transferred to a private developer.

#4 Asset Financing

Asset financing is a way to funding construction projects where you can obtain the plant, equipment, or machinery for your construction project. This type of funding is growing in popularity due to its flexibility over traditional bank loans.

These are the top four ways to funding construction projects in the United Kingdom. Before applying for a loan, it is critical that you check your credentials. Factors like credit score, loan repayment capacity, budget\, approvals and consents, land and site value, building costs, etc. are considered by the lender before granting the funding for your construction project.

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