This presents an opportunity for construction companies to attract more business by offering customized financing options. Helping customers secure loans and pay over months or years not only enables you to take on bigger, more profitable projects but also delivers immense value that makes customers more likely to choose your bids over competitors.
However, financing construction jobs also comes with financial risks that demand careful planning. This article explores various methods construction companies can use to finance customer projects, best practices for qualifying and working with clients, structuring repayment terms, securing your interests, and properly accounting for financing costs in project pricing. Follow these guidelines to reap the rewards while minimizing risks when offering financing for remodeling or new construction projects.
Methods for Offering Customer Financing
In-House Financing The most direct method is for construction companies to finance projects themselves by carrying the loans rather than going through an outside lender. This avoids paying third-party fees and gives you maximum flexibility in setting terms. However, in-house financing significantly increases your risks as the lender. Be extremely selective in vetting customers and securing collateral to protect your interests in case of nonpayment.
Lending Partnerships Partnerships with banks, credit unions, private lenders and other financial institutions allow you to offer customers financing without directly carrying the loans. Customers borrow from the lending partner while you front the construction costs. The lender then pays you the loan amounts. These partnerships make financing easily available while shifting risks like underwriting loans and collecting payments.
Referrals Referring customers to a preferred construction lender requires the least effort. But you lose control over loan terms and the incentive for customers to accept your bids. Make sure to establish reliable referral partnerships so you can be confident in recommending lenders that deliver good customer service.
Best Practices for Offering Financing
Thoroughly Vet Customers Financing essentially boils down to risk management. Do everything possible to minimize chances of payment default. Carefully assess customer qualifications by reviewing income, assets, debts, credit history and any risk factors like bankruptcies, foreclosures, late payments or outstanding collections. Confirm customers have enough dependable income to manage additional loan payments over the entire financing term.
Structure Favorable Loan Terms Set terms that align with the customer’s financial means while also adequately covering your costs and profit margins. Allow for longer repayment periods to keep monthly payments low and affordable. But this also results in more interest paid over time. Find the right balance for each client. Establish clear consequences for late or missed payments as well as options to refinance if financial circumstances change later on.
Tighten Legal Protection Protect yourself by drawing up ironclad loan contracts, security agreements, promissory notes, liens on property and other binding legal filings. This is crucial for direct in-house financing but also smart with outside lending partners in case they fail to make payments. Leave absolutely no question about the customer’s financial and legal obligations. Consult experienced attorneys when structuring financing agreements.
Report All Payments For any loans made by you or a lending partner, ensure every on-time customer payment gets reported to major credit bureaus. This builds the customer’s credit score to help them qualify for future loans. It also provides strong motivation for them to pay on time and maintain a positive credit standing.
Account for Financing in Project Pricing Properly factor both financing benefits and costs into your total project pricing models and contract bids. Weigh factors like:
- Origination/underwriting fees
- Interest payments over loan term
- Closing costs
- Higher material quantities for bigger builds
- Risks of nonpayment
Price projects to cover overhead and maintain adequate profit buffer. This ensures offering financing remains financially viable and beneficial for your business.
Below are answers to common questions construction companies have about offering customer financing:
- What credit score do customers need to qualify for construction financing?
Construction loans typically demand credit scores between 620 and 700 to qualify. This indicates sufficient creditworthiness to manage the sizable loans. Custom requirements vary among different lending institutions though.
- What are typical repayment terms for construction financing?
Most lenders structure construction loans with repayment terms from 5-30 years. 10-15 years is most common. The longer the term, the lower the monthly payment but greater interest paid over time.
- Can I offer financing for small remodeling jobs too?
Financing works best for major projects exceeding $50,000 where paying lump sums upfront poses difficulty for property owners. Minor renovations under $15,000 can utilize simpler financing options like bank cards, personal loans or home equity loans which have streamlined approvals.
- Who retains ownership rights to the property during the loan term?
For new construction, lenders usually file a mortgage lien against the property without surrendering ownership rights until the final payment gets made. Ensure your interests remain fully secured regardless of titleholder.
- How much should I charge customers for arranging financing?
Direct lenders often charge 1-5% origination and underwriting fees, either paid upfront or rolled into the total financed amount. Charge enough to cover procedural costs while remaining price competitive. Rely more on sufficiently marking up project costs rather than burdensome finance fees.
Additional Best Practices Beyond the FAQs above, below are some additional best practices construction companies should follow when offering customer financing:
- Maintain organized records of all financing agreements, payments, project expenses and correspondence.
- Proactively communicate with customers about payment due dates and balance updates.
- Immediately address any late payments or emerging financial troubles.
- Allow reasonable payment deferrals or refinancing if customers encounter major unforeseen financial circumstances. But update agreements to remain adequately protected.
- Consult legal counsel when initially structuring financing agreements and in any situation involving nonpayment, collections or repossession proceedings.
- Explore using project management software offering financing and loan monitoring functions to simplify tracking.
Conclusion Financing enables construction companies to increase sales, boost profit margins on larger projects, accommodate constrained customer budgets, and strengthen competitive positioning. But only if done responsibly through careful customer vetting, favorable loan terms, ironclad contracts, and pricing that balances risks and rewards. Avoid becoming an unregulated direct lender without sufficient expertise. Seek lending partnerships instead and refer customers to reputable financial institutions whenever appropriate. Follow all best practices outlined above and construction financing can provide big benefits for builders and happy property owners alike