Unlike other industries, the construction industry is relatively riskier as it faces many challenges. This is why securing investment through financing is a must for every construction firm in order to acquire materials for new projects, fund growth, manage cash flow, and plan for the future.
For every project acquired in a construction company, sufficient financing is always needed. Certain factors influence the construction sector, including commodity prices, domestic economic cycles, macroeconomics, and other aspects beyond the industry’s control. Moreover, these factors are the common reasons why lending to construction firms becomes risky, especially for established institutions like banks.
While there are several expenditures and receipts that need to be bridged by contractors during construction, their borrowing options are somewhat limited. Ideally, for small to medium-sized projects, the most common form of construction financing is overdrafts from the bank account where there is a maximum limit imposed. On the other hand, contractors with major assets of large projects can utilize other financing forms considering they may have lower interest charges than over-drafting.
Facility Financing Arrangements
Financing arrangements for construction projects differ depending on the kind of owner and the type of facility being constructed. To give you a good example, there are many municipal projects with tax-exempt bonds financed in the United States. The interest payments to a lender are exempt from income taxes. Furthermore, these tax-exempt municipal bonds are available at lower interest charges. Various institutional arrangements have evolved mainly designed for different kinds of facilities and organizations.
Since financing arrangements involve a negotiation and review process, distinct legal requirements in the issue must be met, especially in the case of publicly traded bond financing. The typical schedule in issuing revenue bonds usually takes seven months. While in most situations, the project’s financing mechanism will depend on how long the funds can be obtained.
Let’s say your small firm desires to build a headquarters building. It will require two years for the construction to be completed with a total cost of $12 million – supposing that the $5 million is spent at the end of the first year while the $7 million at the end of the second year. Various options are possible to finance this construction project, including:
- Investment from retained corporate earnings;
- Getting a loan from a local bank at an interest rate of 11.2% with uniform yearly installments more than twenty years to pay for the development costs. The deficiencies for repayments on loans will come from corporate income. A beginning charge of 0.75% for the first loan is needed to cover the reports, legitimate issues, and other legal issues of the engineer; or
- A twenty-year coupon bond at a yearly loan fee of 10.25% with premium installments yearly, the principal’s repayment in year 20, and a $169,000 beginning expense to pay for the development cost as it were.
Aside from the mentioned above, here are some financing tips that you may want to consider for financing your small or medium construction firm.
- Plan Ahead
Creating a plan is always a great start, especially for a small business in the construction industry. Many elements go into a construction project, and each corresponds to a major expense. Without proper planning, in the event of an unexpected development, this can either cause a delay or setback.
- Know Your Budget & Expenses
If you’re planning to take on a construction project, money is most likely at the top of your mind. Obviously, construction isn’t cheap. So, it’s essential to know how much you can afford and the construction costs you have to pay, including the materials and labor.
- See How Far Your Budget Goes
Suppose you already know how much you can spend on your construction project for your small business. In that case, you may start planning the building’s critical elements, such as the design features, floor area, and the quality of materials. To get a detailed estimate of costs, you’ll have to solicit bids from contractors. However, the average costs per square foot can help you with your budget.
- Begin the Design Process
Now that you know what you can afford, you can start hiring a design team to begin planning for your project at this point. Remember to include your preferred design features, floor area, and material quality. When you spend more on the parts and materials, including floor-to-ceiling windows, long staircases, and vaulted ceilings, the more you get to save as they require less floor area.
- Look For A Trusted Supplier
If you need to stick with your budget plan for your small business project and desire to maintain it during construction, ProContractor Supply can help. We have a wide selection of construction materials at competitive prices combined with unmatched customer service. So, you can focus on the details of your project and leave the equipment procurement to us. Our team is always willing to assist and answer your questions here.