How Builders Use Short-Term Funding to Keep Projects Moving

In construction, project delays are not always caused by a lack of work. Sometimes the issue is simply timing.

Land settlements can arise quickly. Suppliers may require deposits before materials are released. Labour, subcontractor and material costs can fall due before progress payments are received.

Even well-run building businesses can experience temporary pressure when cash outflows and inflows do not line up.

In some circumstances, builders explore short-term funding to manage a defined timing gap and keep a project moving while waiting for an expected payment, settlement or other commercial event.

Cash flow pressure does not necessarily mean a business is underperforming.

Builders that are:

managing several projects at once;
taking on larger jobs;
experiencing rapid growth; or
committing significant expenditure early in a project

may experience periods where project costs fall due before corresponding revenue is received.

Construction projects often involve significant upfront or staged expenditure, including:

site works;
materials;
labour;
subcontractors;
insurance;
equipment; and
other project costs.

Where project milestones, approvals or payments shift, temporary cash flow pressure can arise even where the underlying project remains commercially viable.

Every project is different, but there are several situations where builders may encounter short-term funding pressure.

Site or Land Settlement Timing

Land or development opportunities can sometimes involve relatively short settlement periods.

Where longer-term funding cannot be arranged within the required timeframe, a business may explore short-term funding as one possible way to bridge the period between acquisition and a longer-term finance or exit event.

Whether that approach is available will depend on the circumstances of the transaction and lender assessment.

Supplier, Trade and Credit Limit Pressure

Builders often operate on established trade and supplier accounts, but those accounts usually come with credit limits and payment terms.

For example, a builder might have a 30-day end-of-month account with a $30,000 credit limit. Even if the account is technically within terms, that limit can be reached before materials for the next project need to be ordered.

Until the outstanding balance is paid down, the builder may not have enough available credit to place the next order.

Increasing a supplier credit limit can also take time and may involve:

additional credit applications;
updated financial information;
internal supplier approval; or
a review that may not result in the requested increase.

Trade contractors can create similar timing pressure. Where a trade is supplying and installing a package, they may require a deposit, staged payment or relatively short payment terms — often around 14 days — while the builder may still be waiting on the next project payment.

These situations can create a temporary working-capital gap even where the underlying projects are progressing normally.

Delayed Progress Payments

Progress payments may be affected by:

weather;
inspections;
certifications;
variations;
client/bank delays; or
other project administration.

Meanwhile, wages, subcontractors, suppliers and other project costs may continue to fall due.

Overlapping Projects

A builder may have one project approaching completion while another is ready to commence.

Where cash from the first project has not yet been received, but costs on the next project have already begun, a temporary funding gap can arise.

Short-term funding is generally designed to address a defined commercial requirement over a limited period.

Depending on the circumstances, builders may explore it for purposes such as:

keeping a project moving while awaiting a known payment;
funding a time-sensitive business opportunity;
covering costs associated with a defined project stage;
bridging the period before refinance or settlement; or
managing a temporary working-capital gap.

Short-term funding is not intended to replace appropriate long-term finance or ongoing working-capital planning.

A clear purpose, realistic loan term and credible repayment or exit strategy are important parts of the transaction.

Timing can have a significant effect on construction projects.

Delays may contribute to:

idle labour or equipment;
supplier scheduling issues;
missed commercial opportunities;
project sequencing problems;
pressure across multiple jobs; or
additional project costs.

For some builders, short-term funding may provide additional flexibility where there is a clearly identifiable timing gap.

However, the cost of the funding, available security, proposed term and exit strategy all need to be considered.

Short-term business funding is generally most relevant where the requirement is specific and time-bound.

It may be used to address:

a temporary timing mismatch;
a defined project requirement;
a bridging period; or
a known commercial event.

It is generally not designed to:

replace long-term business finance;
fund ongoing losses indefinitely;
support open-ended expenses without a clear repayment plan; or
remove the need for appropriate cash flow and project planning.

A lender will typically want to understand why the funding is required, how long it is needed and how it is expected to be repaid.

Construction projects often involve:

defined stages;
milestone payments;
settlements;
identifiable assets; and
clear project events.

In some circumstances, these characteristics can make it easier to define the purpose, term and proposed exit for short-term funding.

That does not mean short-term funding is suitable for every construction business or every project.

Whether a transaction proceeds will depend on the lender’s assessment of the overall circumstances, including the funding purpose, available security, requested term, proposed exit strategy and supporting information.

Timing gaps are a common challenge in construction.

A project may be commercially sound while still experiencing a temporary mismatch between when costs need to be paid and when expected revenue is received.

Short-term funding may be one option in some circumstances, but it should be considered in the context of the particular transaction, including the cost of the funding, property security, proposed term and repayment strategy.

If you are exploring short-term, property-secured funding for a genuine business purpose, you can learn more about How the Process Works or Start Your Enquiry with builderloans.com.au.