Benefits of Construction Loans

Uncomplicated access to the right financial resources at the right time is vital for success in the property development sector. This is where specialist finance solutions like construction loans come into play, offering a lifeline to businesses for which mainstream bank loans and commercial mortgages are unsuitable for their needs.

Tailored from scratch to meet the unique requirements of each borrower and the projects they’re undertaking, construction loans have the potential to be exponentially more flexible, versatile and accessible.

How Do Construction Loans Work?

Construction finance is a specialist solution for construction companies and property developers, consisting of bespoke agreements aligned with the unique requirements of the projects they undertake.

A basic overview of how the facility works is as follows:

1. Application Submission: To secure a construction loan, applicants need to provide a detailed project plan, cost estimates, and a clear repayment strategy. Evidence must be provided to verify the viability of the project, the borrower's financial status, and their planned exit strategy.

2. Loan Approval: Once the application is submitted, lenders scrutinise the project's feasibility, the borrower's creditworthiness, and the proposed budget. If the project aligns with the lender's criteria, approval is granted.

3. Drawdowns: Construction loans are not issued in a lump sum like a conventional loan. Instead, they are released in stages, referred to as 'drawdowns.' These stages coincide with various milestones in the construction process. As each phase is completed, the borrower can request a drawdown to cover the associated costs.

4. Interest-Only Period: During the construction phase, borrowers typically pay only the interest on the outstanding balance. This eases the financial burden during the project's development, as businesses are not saddled with full loan repayments. If preferred, there may also be the option of ‘rolling up’ interest into the final repayment.

5. Transition to Mortgage: Once the project is complete, the loan can transition into a more conventional borrowing product, allowing the business to gradually repay the owed amount over the course of several years.

6. Repayment: The final step is repayment of the principal balance, which takes place in the form of a single lump-sum payment - typically when the property or development is sold.

What Are the Benefits of Construction Loans?

While various funding options are available to construction companies and property developers, specialist construction finance is the preferred option for many businesses for the following reasons:

1. Tailored Funding: Construction loans are customised to match the unique requirements of property development projects. This tailored approach ensures that businesses receive the right amount of capital at the right time, enhancing project efficiency.

2. Flexible Terms: These loans offer flexibility in terms of interest rates and repayment structures. Borrowers can negotiate terms that suit their immediate and long-term objectives, helping them manage cash flow throughout the project.

3. Interest-Only Period: Many construction loans include an interest-only period during the construction phase, during which the only repayment that needs to be made is the agreed interest payment.

4. Project Oversight: Lenders provide ongoing monitoring and support, including site inspections, to ensure that the project stays on track, helping mitigate risks and ensuring timely completion.

5. Efficient Capital Deployment: Construction loans allow businesses to allocate their capital more efficiently. Instead of tying up large sums in a single upfront payment, borrowers can use the funds as needed, optimising their cash flow.

6. Alignment with Project Milestones: The allocation of funds in accordance with project phase completion promotes accountability and efficiency. This ensures that funds are used for their intended purposes and not diverted to other areas of the business.

At Rosewood Finance, our specialist team of commercial finance brokers can help you find and secure an affordable construction loan to fund your project. Call anytime for an obligation-free consultation, or email us with details of your requirements and we’ll get back to soon as possible.