Construction Payment Chain and Financial Risk
Let’s dive into a scenario when a Real Estate Developer decides to commence a project! The developer purchased a piece of land and started a development project, Happy Residence. The developer then hires a Main Contractor to build Happy Residence. In most cases, the Main Contractor does not oversee every little part of the construction. Instead, a few subcontractors are delegated to complete each part of the construction, from earthwork, piling, framing, roof, plumber, and so forth.
| Construction Payment Chain |
| Cash Buyer, End Financing Providers Real Estate Developer Main Contractor Tier 1 Subcontractor Tier 2 Subcontractor Tier 3 Subcontractor … |
A payment chain describes how funds for development flow from Real Estate Developer, to Main Contractor and followed by subcontractors in different tiers.
Payment Chain Indicates Non-direct Payment to Service Providers
In the Construction line, the source of funds comes from top single source to bottom, where all the actual service providers are. For example, when Tier 1 Subcontractor finishes his work, he redeems payment from the Main Contractor. The Main Contractor is only able to pay the Subcontractors when the Developer releases funds.
This scenario is seen as high risk from the perspective of a financial institution, including commercial banks. Consequently, Subcontractors are not preferable as bank loan clients.
Resources are Available to Those Who are Determined to Find Them
Commercial banks are the most common sources of business financing, from term loan to tradeline facilities. Although subcontractors may not be preferable bank clients, there are other sources of business financing, as well as different types of financing facilities in the market. In the following table, we listed the types of financing facilities available to different types of construction companies.
| Types of Construction Companies | Potential Financing Facilities |
| Real Estate Developers | Bridging Loan |
| General or Main Contractor | Working Capital Financing, Purchase Financing, Invoice Financing, Term Loans |
| Earthwork Contractor | Equipment Financing |
| Subcontractor | Equipment Financing, Purchase Financing, Invoice Financing |
| Building Material Supplier | Working Capital Financing, Purchase Financing, Invoice Financing |
| ID and Renovation Contractors | Working Capital Financing, Purchase Financing, Invoice Financing, Term Loans |
SME Loans are for Established Businesses
It is crucial to understand that most financial institutions only consider giving out loans to established businesses. In a business lifecycle, startup companies are generally non-targeted. SME or business loans are approved on the basis that the company is trusted to be able to pay back what was loaned. Generally, financial institutions justify the ability to repay through business finance documents, especially Auditor Report, Management Accounts and Company Bank Statements.
In a nutshell, SME loans are for businesses with proven track records. They are usually businesses running for more than 3 years, with steady business transactions.
Business Financing is Critical to a Business’s Liquidity and Growth
To say the least, all businesses need to seek financing as it’s highly disadvantageous to run a business with cash. Apart from removing a company’s cash reserves, it also limits a company’s potential to grow. Seeking financing helps businesses maintain or improve liquidity.
If this article finds you and has given you a different perspective when it comes to business financing for construction lines, you have come to the right website! At Vanta Capital, we pride ourselves for our professionalism especially in serving Construction companies. We have helped more than 5,000 companies acquire the business financing they need. Our team has in-depth business knowledge in the Construction line. By engaging with Vanta Consultant, our clients are able to increase their working capital, and achieve significant revenue growth with our business financing solution.
