If you’re a first-time property developer, you’ll need to understand the complexities of funding construction projects. From initial acquisition costs and building materials to staffing, suppliers and ongoing project costs, there are numerous challenges to face, which business finance can help you address. 

We outline the key considerations when seeking construction finance, including how the funding works, what lenders need and how to choose suitable solutions. 

What is construction finance?

Construction finance is an area of funding to support builders, property developers and construction companies, helping to cover expenditure throughout these projects. You can use the capital for various purposes, such as covering upfront costs of materials and subcontractors or plugging cash flow gaps during projects, especially when there are delays in progress or payments. 

This is especially important when you encounter issues like late payments and spiralling project costs, which can hold up builds and cause difficulties with meeting tax commitments and taking on new projects.

What finance options are available to construction businesses?

There are several finance options to consider when funding a construction project, including commercial construction loans, development finance and bridging loans, or you can look for equity investors or use refinancing or invoice financing to unlock capital from existing assets.

Main types of construction finance

Let’s look at the main types of construction finance or funding to support property development needs:

• Construction loans: Short-term loans designed to cover building costs, with funds released in key stages of the construction projects.
• Property development loans: More flexible and larger-scale funding for development projects, often involving multiple sites and covering land acquisition and construction. They also involve phased funding.
• Bridging loans: Shorter-term loans to cover funding gaps to secure property acquisitions and initial construction costs before the sale of an asset or arranging a long-term finance agreement.
• Joint ventures: A partnership with other developers or investors who can provide funding and expertise in exchange for a share of the profits.
• Mezzanine finance: A hybrid solution that combines debt and equity financing to reach funding targets, with an equity exchange component.

Alternative finance solutions to fund your construction projects

Beyond specialist construction finance, there are other funding options to consider. Here are some alternatives to using a construction loan:

• Invoice finance: An advance of pending client invoices to unlock crucial working capital to ease cash flow and cover certain construction expenses.  
• Secured and unsecured business loans: Secured loans offer access to large sums of capital and are backed by assets, but are typically longer-term solutions. Unsecured loans are short-term loans that incur higher fees but are faster to access, offer greater flexibility and don’t require collateral. 
• Refinancing: By releasing equity from existing properties or assets, you can free up capital to reinvest in your construction project.
• Equity finance: This is investment from the likes of private equity firms, venture capitalists or angel investors, who provide capital in exchange for a share of control and future profits. 

Also, it's worth exploring government-backed schemes and grants, especially if your construction project is in a location, industry or area of interest primed for funding schemes.

{{business-funding-on-your-terms="/components"}}

How does construction finance work?

Construction finance helps firms purchase building materials, fund equipment and pay contractors, without delving into reserves or impacting other financial commitments. It can be essential for first-time developers and small construction companies for managing cash flow and investing in projects while preserving crucial working capital.

It can work in various ways, depending on the type of construction finance you choose. However, using a construction loan or property development loan usually involves a staggered release of funds throughout the project to help manage costs at different stages, with development finance also used for land acquisition. 

Construction finance rates, repayments and security

In most cases, construction finance lenders require developers to use assets (often property) as collateral. Secured construction loans reduce lenders’ risk level. 

In the UK, construction finance interest rates range from around 4% to 12% annually, while there are other costs to consider, such as arrangement, valuation, drawdown and exit fees, plus legal costs, and in some cases, charges for early repayment (if required). 

Construction loan repayments usually consist of regular interest-only payments during the build, with the principal repayment paid in full after completion, via either property sales or refinancing.

If using a bridging loan, capital is provided as a lump sum upfront, as it’s typically for buying land or premises ahead of building and renovations. Repayments are usually made in full after a property has been sold or once additional funding has been secured, with rates higher than construction loans due to the shorter terms and increased risk.

What are ‘draws’ in construction finance?

Commercial construction loans and finance solutions (as opposed to straightforward business loans) involve funds being released in stages, which are sometimes referred to as ‘draws’. A sum of capital and a schedule of staged releases of funds will be agreed with the lender. These will be payment dates spread out across the build, which align with key milestones in the process.

How much can I borrow with a construction loan?

The amount you can borrow with a construction loan varies depending on the scale of your project, the type of property and its projected value. Lenders typically assess the Gross Development Value (GDV) and expected project costs to determine the loan size. Most secured construction loans allow borrowing of up to 70–80% of the total project cost, though this can vary depending on the lender, your experience and the perceived risk of the project.

How long will it take me to get a construction loan?

It usually takes 4–8 weeks to get a construction loan from the application stage to the release of funds, depending on your situation, the scale and complexity of the project and specific lender requirements and processes.

What is the typical length of the construction loan contract?

Most construction loan providers offer terms of between 6 and 24 months, with flexibility to extend if the project timeline changes. Property development loans can be as long as 36 months for larger-scale projects.  Some providers include a line of credit from which to draw down additional funds up to an agreed limit.

Can I get a loan as a first-time property developer?

Yes, construction loans and finance options are available to both new and experienced property developers. However, as a first-time developer, approvals can be more challenging, applications may take longer, and lenders are likely to offer summer sums of capital and flexibility than with established developers. You may also face higher fees and stricter terms due to your higher perceived risk profile.

How to fund a first-time construction project

Securing construction finance for building projects is not simple, especially for first-time developers, so thorough preparation is key. You need to start by assessing and defining your project needs and scoping out your budget and timeline, allowing some room for unexpected costs. 

Lenders will expect a detailed plan to get a full understanding of your situation, project and funding requirements, and they’ll want to be assured about your ability to make the necessary repayments. So, they’ll also take your credit score, financials and expertise, even if you lack a little experience.

Choosing the right financing option is another key step. Construction loans with staged funding are ideal for ground-up builds, while small business loans may suit smaller builds and renovations and those seeking more flexibility or faster access to capital. Spend a good amount of time researching different options and comparing finance providers, or use a finance broker to save time, get guidance and match a suitable lender to your project needs.

What are the key requirements for a construction loan?

When applying for a construction loan, ensure you’re well prepared with key documentation and details of your construction project.  Here are the main things to prepare before approaching prospective construction finance lenders:

• A detailed project plan: A clear outline of your construction project, including timelines, estimates and contractors, is vital for your application. 
• Planning permission and building regulations compliance: Gather proof of planning approval or permission for development, plus documentation that shows you’ve met required UK building standards and regulations.
• Project insurance: You’ll need to provide details of your insurance policies, including various liability coverage.
• Credit history and financial records: You’ll have to submit various financial records and bank statements, and lenders will conduct credit checks and risk analysis. Also, you’ll need to show the level of investment you intend to provide and what further funding you require.
• Property/development valuation: Get an independent assessment of the property’s/site’s current value and projected GDV, as this influences the amount providers are willing to lend you.
• Experience/credentials: While you may be a first-time developer, lenders will want to know what experience you have and the expertise and track record of your contractors/project managers.
• Exit strategy: For lenders to determine your funding terms and repayment structure, you must decide on your exit strategy, such as selling the property, refinancing or generating rental income. 

What is the difference between a building loan and a construction loan?

The key difference between a building loan and a construction loan is the size and scope of the project. Construction loans are generally for larger development projects and new-builds, typical commercial property, with funds released in stages tied to construction phases. Building loans typically support smaller projects like renovations, extensions or home improvements, and funds may be released in stages or provided upfront, depending on the project scale.

How to choose a construction finance provider

With various construction finance options available to developers and numerous UK lenders offering funding solutions, how do you go about choosing a suitable provider?

We’ve outlined some key questions to ask yourself to support your construction finance decision making:

• How much capital do I need for each stage of the project (including a contingency buffer)?
• How soon do I need access to funding?
• How long will the project take and how long do I need the capital for?
• What is my exit strategy and what funding and repayment structure is best suited to my project needs and exit strategy?
• How much flexibility do I need from the finance facility?
• What interest rates and fees do different providers charge and what is the total cost of borrowing in each case?
• Am I happy to use assets (usually property) as security?
• Do I want a specialist construction finance provider and do I need the support of a finance broker? 
• Am I comfortable with any form of equity exchange within my agreement?
• What level of support do I need from the lender as a first-time developer?

Can I use a small business loan for construction projects?

Yes, a small business loan can be used to finance a construction project, particular smaller-scale builds. Unlike construction loans, which involve staged drawdowns to match building timelines, a standard small business loan typically involves a lump sum and fixed monthly repayments. So, you need to manage your cash flow carefully to navigate the uncertainty involved in construction products. 

Some lenders, like iwoca, offer small business loan facilities that operate like lines of credit, allowing you to draw funds as needed, which gives more flexibility than construction loans’ staged funding.

Using a flexible business loan to manage construction cash flow challenges

One of the biggest issues for developers is managing cash flow for construction projects and addressing shortages, as property builds are notorious for unexpected, escalating costs, which can lead to financial strain and delays. While dedicated construction loans help cover various project costs at different stages, these issues can result in cash flow gaps while waiting for funds to be released. 

A flexible business loan, like iwoca’s Flexi-Loan, offers far faster access to funds than specialist construction loans – often in a matter of days – and doesn’t include scheduled capital release.

Our loans are designed to support SMEs and ease cash flow management. You can draw from the facility as and when required, only paying interest on the funds you use, and repay the loan early, free of charge, to save on unnecessary interest payments.

Also, our loans are unsecured, so you don’t need to use business assets as collateral, and you can borrow up to £1 million for just a few months or longer periods, up to 5 years, depending on the scale of your construction project.  

Learn more about how to get a business loan to support your construction finance needs, and use our business loan calculator to see your likely repayments.