Construction Finance – how it can help your small business
Construction finance – which includes both invoice finance and asset finance – can really help your construction business. Find out how it works here.
When most people think of construction, they think of big things.
Big machines, big projects, and big ambitions – whether you’re helping to build a humble house or a soaring skyscraper.
Unfortunately, this also means big bills and big contracts. Indeed, a survey by construction finance provider Bibby Financial Services found that the average contract size for construction subcontractors was just under £176,000 in 2019.
This means that getting the proper finance in place is crucial – especially given that contracts are often paid in stages, and require upfront investment in materials and other overheads.
Finding the right construction finance for your business can also give you a big competitive advantage, with the same survey finding that a third of UK subcontractors are using bank overdrafts to finance their businesses.
If you want to dive straight in, simply tell us more about your business to receive bespoke invoice finance quotes from some of the UK’s top construction finance companies. This will show you exactly how construction finance could help you take your construction business to the next level.
Alternatively, read on for more info on what construction finance is, how construction invoice finance and construction asset finance work, and who are some of the UK’s leading construction finance companies.
What is construction finance?
At its simplest level, construction finance is just finance for construction companies. What it essentially boils down to is different types of loans that work with your business and help it grow.
- Invoice finance – as the name suggests, invoice finance allows you to borrow money against the value of your invoices (or contracts) to ensure cash keeps coming into your business and you can afford to take on new work.
- Asset finance – asset finance is mainly about getting hold of new equipment, either by leasing it (essentially paying money regularly to borrow it) or hire purchase (making larger regular payments so you eventually own it).
Using these options effectively can make a big difference to your business, helping with cash flow and securing you the money you need to grow.
We’ll now take a detailed look at each:
What is construction invoice finance?
This infographic explains how it works:
While the same basic rules apply, things are slightly more complicated for construction businesses, as contracts are often completed in stages.
Therefore, many lenders will provide payment both on invoices and an Application for Payment (although this may have to be certified by the client).
The Application for Payment sets out what will be done and at what cost, but isn’t the same as a proper invoice, which is generally asking for payment after a job is completed.
Once you’ve signed up with a lender and have an Application for Payment, you upload this via an online system. The lender then pays you up to 95% of the contract value, often within 24 hours.
From this point, you can get on with your business as normal.
When the work is completed and you’ve submitted a proper invoice, then the lender will chase payment from the client (chasing a contractor on behalf of a subcontractor, for example).
They can even do this without anyone knowing you’re using an invoice finance company. Many lenders offer confidential construction invoice finance, and will either use your company name when contacting your clients or step back and allow you to manage your supplier payments
The client then pays the construction finance lender, and you receive the rest of the contract value, minus the fee you pay the lender for their service.
So, in short, while it may cost you a little bit more, there are three huge benefits to construction invoice finance:
- You get your money much quicker
- You have a much more stable cashflow
- You don’t need to rely on credit cards or personal savings to fund your business
For a much better idea of how construction invoice finance can help your business, we’ve taken a look at how it’s helped a real UK construction company.
And there are countless examples up and down the country of companies like YBC using construction finance to ensure that the money is always there to take on big contracts and get to where they want to be.
For a much better idea of how construction finance could help your business, simply tell us your business requirements to receive invoice finance quotes from some of the UK’s top construction finance companies – all tailored to the real-world needs of your construction business.
But, if you’re more worried about how you’re going to afford that new dump truck or mobile crane, then you’ll need to get up to speed on construction asset finance.
What is construction asset finance?
Construction asset finance just means different ways of paying for the things your business needs, whether that’s a hulking excavator, a fleet of trucks, or an office full of PCs.
It’s a bit like buying a car – you can pay the full price up front, pay bit by bit, or just pay while you’re using it and then give it back.
The big difference is price, of course – a full-sized excavator can cost up to £400,000, so maybe think of it more like buying a house than buying a car.
The main options available are leasing and hire purchase.
We’re going to explain them properly below, but very roughly, leasing is just paying to use the equipment (so a bit like renting a flat), while hire purchase is paying the full fee bit by bit while you’re using it (so more like paying the mortgage on a house).
Using leasing or hire purchase can also mean you pay less tax overall, but this aspect is quite complicated, so it’s best to discuss it with your accountant.
IMPORTANT – With both of these options, you DO NOT initially own the equipment. The construction finance company owns it, and you either pay to use it, or pay in bit by bit until you own it.
How does construction leasing work?
The best way to get your head around leasing is to think of it as renting or borrowing – you pay to use equipment for a specific period of time, and then give it back at the end.
The big difference with leasing is that the equipment is bought on your behalf. You choose what you want to buy, and the construction finance company does the actual buying.
The crucial point is that despite paying a regular fee, you never own the equipment – you are only paying to use it.
There are four basic steps in the leasing process:
- Choose the equipment you want, and negotiate any discounts or payment terms
- The finance company then purchases the equipment on your behalf
- You then borrow (lease) the equipment for an agreed period of time (e.g. two years) and make regular payments to the finance company
- Once the agreed period is over, you give the equipment back to the finance company
Depending on the lender, there can be more flexibility – you might be able to easily extend the lease (borrow for longer), or make a final payment to own the equipment after the lease – but that is the basic process.
One big advantage of leasing is that it makes it easy to regularly upgrade your equipment whenever you need to. Since you don’t own the equipment, you can simply agree on short leases, and always have the cutting-edge kit you need to do the job.
How does construction hire purchase work?
As mentioned above, hire purchase is a bit like buying a house with a mortgage.
You choose what you want to buy, and then pay the money bit by bit until you own the thing you’ve been paying off.
There are some key differences, though. Even if you buy with a mortgage, you do still technically own your house – you just have a huge debt that you can’t quickly pay unless the house is sold.
With hire purchase though, your equipment is owned by the construction finance company until you make the last payment, so always remember this.
Like leasing, there are four basic steps in the hire purchase process:
- Choose what you want, and who you want to buy it from
- The construction finance company then buys it on your behalf and gives it to you
- You make regular payments while using it (plus an initial deposit depending on what you’ve agreed with the finance company) for an agreed period of time
- Once you’ve made the final payment, it’s yours
Hire purchase is great for equipment you want to own, but need help financing.
You’ll make higher regular payments than with a leasing agreement, but you’ll actually own the equipment once you’ve finished making the payments, rather than just having paid to use it.
Is construction asset finance right for my small business?
Cashflow is crucial for small construction businesses, and getting the right construction asset finance solution in place can really help.
Obviously, overall, it’s going to cost a bit more than simply buying what you need upfront, but many small businesses are simply not in a position to spend significant sums in one go.
Whether you use hire purchase or leasing, construction asset finance allows you to spread this cost out over a long period, making it much easier to balance the books and pay regular overheads like wages and office costs.
It also combines really well with construction invoice finance – you can use invoice finance to unlock the money you have tied up in pending invoices or Applications for Payment, and then use some of those funds to make regular asset finance payments so you can purchase or lease the equipment you need to do the job.
The UK’s top construction finance companies
Now you’ve got a good handle on how construction invoice finance and construction asset finance work, we’re going to take a quick look at four of the UK’s top construction finance companies.
For a really good idea of how invoice finance could help you though, simply tell us a bit about your business to receive bespoke quotes from some of the UK’s leading construction finance lenders, all tailored to your specific needs and requirements.
- Bibby Financial Services
- Aldermore Bank
- Hitachi Capital
- Ultimate Finance
All of these lenders have strong track records, and understand the challenges facing construction businesses.
Bibby Financial Services
- Supporting construction businesses since 2004
- Experience working with over 80 construction trades
- Well-developed asset finance offering
Bibby Financial Services is one of the UK’s major companies when it comes to invoice finance – it was founded in 1982, and has offered construction finance since 2004. It supports SMEs all over the UK through a network of 19 regional offices.
In terms of construction invoice finance, Bibby accepts both invoices and uncertified Applications for Payment – meaning you can get quicker access to funding than with some other providers.
Everything is handled via an online portal, making it easy to upload documents and track your funding.
Bibby also has a well-developed asset finance offering, making it a perfect fit for construction SMEs that want to rapidly expand.
Finally, the company also has a strong reputation when it comes to customer service, with a superb Trustpilot score of 4.6 from 392 reviews.
- Funds released within 24 hours of approval
- Great customer service
- Annual turnover of £250k+ preferred
Aldermore was founded as a challenger bank in 2009, and began offering invoice finance a year later. It offers products and services for both consumers and businesses, and prides itself on its support for SMEs.
Aldermore’s construction invoice finance offering is strong, with arrangements agreed quickly (anything from a few days to a few weeks, depending on how complex your requirements are). Up to 70% of the contract value is paid within 24 hours of either an invoice or uncertified Application for Payment being approved.
Businesses are given their own relationship manager, who really makes an effort to get to know their business and understand their needs.
Aldermore does however prefer businesses with an annual turnover of at least £250,000, so may not be suitable for some smaller construction SMEs.
Alongside this, Aldermore offers award-winning asset finance. Its feedback is excellent, with an average Trustpilot score of 4.4 from 702 reviews.
Hitachi Capital UK
- Asset finance specialist
- Over 35 years of experience in business funding
- Funds both SMEs and larger businesses
Hitachi Capital is one of the big hitters when it comes to UK business finance. It’s part of the massive Hitachi conglomerate and funds both SMEs and larger businesses, making it an ideal fit for any construction business with big ambitions.
While it does offer invoice finance, where Hitachi really shines is asset finance. Hitachi funds construction equipment with a value of £10,000–£500,000 over two to five years, meaning they can really help you spread out the cost of that new digger over a long period.
The whole process can be done online, and all leasing agreements come with the option of a final purchase fee.
Rates are competitive, starting at 5.9% APR.
As you’d expect from a company with such a long track record, Hitachi also excels when it comes to customer service, with an average Trustpilot score of 4.8 from 420 reviews.
- Nearly 20 years of experience
- Funding within one week
- Annual turnover over £600k required
Ultimate Finance was founded in 2001 and has grown rapidly, lending £1.6bn to SMEs in 2019. It’s part of the Tavistock Investment Group, a wide-ranging finance company owned by billionaire (and owner of Tottenham Hotspur) Joe Lewis, meaning it has the financial muscle to really grow with your business.
Like the other lenders featured here, it has an excellent reputation for customer service, reflected by an average Trustpilot score of 4.9 from 362 reviews. It's also solution-led, meaning it will really take the time to understand what you need to help your business grow.
This includes both invoice and asset finance, so Ultimate Finance is a great partner for any business that wants an all-in-one solution.
However, Ultimate Finance is also the most selective lender on this list. It will only give construction invoice finance to companies that have an annual turnover over £600,000, so wouldn’t work for early-stage construction SMEs.
So, that’s a few of the UK’s top construction finance companies – but to see how construction invoice finance could help your business, let us know your construction finance needs to receive quotes from top construction lenders, all tailored to your specific requirements.
There’s no doubt that construction finance can seem intimidating for anyone who doesn’t spend their spare time combing through financial websites.
In reality though, it’s pretty simple – construction invoice finance helps you make sure the cash keeps coming in while you wait to be paid by your clients, and construction asset finance lets you spread the cost of your equipment, or just pay for what you need when you need it.
While this will cost a little more than simply keeping things going yourself with savings or an overdraft, the benefits are huge. You’ll get a stable and reliable source of funding, and an experienced partner that will work with you to grow your business.
When considering any of these options, always remember that you’re in control – there are lots of finance companies out there, and anyone who just tries to confuse you with complicated financial terms that you don’t understand simply isn’t worth working with.
Instead, look for companies with construction expertise, and a solid track record in working with small businesses – they’ll understand the challenges you face, and give you the support you need to succeed.
Whatever you do, don’t just go for the cheapest option. You’re looking for a reliable long-term solution for your business, so making a quick, impulsive decision could cost you for years to come.
If you put the work in and find the right fit, though, then construction finance can help your business soar.