Australia’s construction industry accounts for 10.5% of Australia’s GDP, contributing $360 billion and offering jobs to one in ten Australians*. While large companies make headlines, it’s the small businesses – making up 98% of the industry – that are the backbone of this sector, with an estimated 360,000 small enterprises engaged in various construction activities.

Cash flow challenges are a common hurdle for these small businesses, often only receiving payment upon project completion. This is where commercial construction loans, a type of secured lending like asset finance, become vital. Small construction businesses looking to stay afloat and succeed should consider the best construction loan options in Australia, which we have compared below.

*Based on data supplied by the Australian Construction Industry Forum in May 2023, construction accounts for just under 10.0% of total employment across Australia.

Why Construction Loans Often Need Expert Guidance

Construction loans, specifically due to their high amount and relative sophistication compared to unsecured loans, business credit cards or an unsecured line of credit may be better obtained with the help of a specialist. If required, brokers can help navigate the intricate mix-and-match process that is often necessary between the specific requirements of those seeking commercial construction finance and the lenders and banks that provide it. Apply for a business loan with money.com.au’s unique algorithm to get matched with a commercial construction loan specialist, and if complex needs demand, via a business loan brokerage, using the link below:

Use our form to get tailored construction loan offers based on your situation and credit score. Free guidance from a brokerage if necessary. Clear and transparent terms. Understand what you will be paying and how the process works.

AUD Find Construction Loans

Construction Loans: The Base Figures

Best Construction Loans in Australia

#1 Revas Financial Services

• Specialist Mortgage Broker
• Headed by Luc McKell
• All Client Reviews are Highly Positive
• Avg Interest Rate ~10%/yr
• Only Pay Interest on What You Borrow
• Easy Application Process
• Annual Turnover Min. $200,000/yr, Must Be Profitable Business
• Pending Review on smallbusinessloansaustralia
  

#2 Prospa

• Australia’s no.1 Largest Online Lender
• Line of Credit Available Between $2,000 – $150,000 (Extended from $100,000 in 2021)
• Over 6,000 TrustPilot Reviews, rating Prospa 4.9 / 5
• Pay Suppliers Directly from your Line of Credit
• No Asset Security Required for Facilities under $100,000
• Prospa review here

#3 Shift (Formerly GetCapital)

• Import Line of Credit, ideal for Businesses Trading Internationally
• Facility up to $750,000.
• Transparent, Top-Rated Non-Bank Business Lender
• Widest Variety of Lending Solutions out of Australia’s Online Lenders
• Business Overdrafts and other Working Capital Facilities Available
• Shift review here

#4 Lumi

• Line of Credit up to $250,000
• Trusted Direct Lender
• Drawdown from $2,000 – $250,000
• Repayments Available for up to 24 months
• Quick and Easy to Access
• Lumi review here

#5 Moneytech Business Loans

• Access $50,000-$250,000 in 48h
• 120 Day Repayment Terms
• Refinancing Existing Debt is Okayed
• Invoice Financing and Additional Functionality of FX Payments
• We Could Not Find Customer Reviews Only
• Moneytech Review
  

How to Apply to the Top Construction Loan Providers in Australia via a Single Form?

Lend (lend.com.au) is a smart business loan service that matches borrowers and lenders through its proprietary technology and unique algorithm. It works with dozens of Australian business lenders, and specifically lenders that specialise in construction loans (working with the aforementioned top lenders). Lend boasts a 4.8/5 score on TrustPilot, and is a member of the FBAA, CAFBA, and MFAA. Application is done online and does not impact your credit score.

Editorial Rating: 99.2%

⭐⭐⭐⭐⭐

Additional Experienced Construction & Property-Backed Secured Based Lenders

We have listed a number of Australia’s leading online business lenders who are used to providing multi-purpose business loans, either on a secured or unsecured basis. Here we list lenders with specific construction loan experience.

Maxiron Capital – Best for large-scale projects

Maxiron Capital commercial construction finance is advertised as up to $2,000,000 with funding possible in under 24 hours. Its case studies also demonstrate that should a borrower require more capital, they will consider this too. In fact, Maxiron refers to previous clients who have borrowed $3.5m and $15.2m for the continuation of their construction projects. 

To qualify for Maxiron Capital construction finance, borrowers must:

• Have a registered ABN.
• Be a contractor, subcontractor or a qualified builder.
• Be able to demonstrate a detailed building plan (such as floor plan, raw material requirements,profit projections and subcontractors etc)
• Present a licensed builder (if the borrower is not building property themselves).
• Realistically forecast the GDV (value of finished goods).

 Maxiron Capital construction finance case study:

Source: www.maxironcapital.com.au/construction-finance.html

RAMS – Best for SME/self-employed property developers

RAMS offers a range of everyday home loan and deposit products, and runs a specific campaign targeting individuals and businesses looking at constructing a property.

For construction projects, RAMS has some unique features:

• Loan repayments during the build are interest only, helping borrowers manage their budget.
• A 24-month term to complete the build.
• Accessible to both owner occupiers and investors.
• A local RAMS Home Loan specialist to guide through the process.

RAMS construction finance can be combined with the RAMS essential home loan which provides home loans of 70%-80% of the value of the property. RAMS was the winner of the Best Self-Employed Lender for four years running at the Australian Lending Awards (2017-2020). 

How Do Construction Loans in Australia Work?

Construction loans are usually taken on a mid term basis – the idea is that the finance cycle matches the length of the construction cycle, so really however long the project is set to take, the finance should be of a similar term. This will vary depending on individual circumstances and the scope of the construction project but could be anywhere from a year through to much longer for large scale construction projects.

A construction loan is intended to cover the costs of building a structure on an undeveloped piece of land or property. There are two methods in which lenders calculate the total amount which can be loaned to property developers.

Firstly, there’s the ‘LDCR’ which takes into account the land costs and build costs. In this instance, usually around 80% of a project’s ‘hard costs’ are financed (such as raw materials and land) but some construction lenders will provide capital for ‘soft costs’ too (such as advertising and professional fees) and will consider the overall cost of the construction project.

The second construction loan calculation bases the amount of finance offered on the projected value of the property once development is complete (known as gross development value or GDV). If a construction loan is based on GDV then usually up to 70% of the GDV can be loaned, so if the property has sufficient resale value, this could be one way to cover 100% of the construction costs.

In both instances, the property or building being constructed will be used as a form of security in order to secure the loan.

Once the development is finished, the property will either be sold or the construction firm will receive complete payment for the project and the construction loan can be repaid.

It can be quite common for construction loans to be released in stages, following the progression of the project:

1. Initial sum on loan approval
2. Completion of foundation
3. Completion of structure framing
4. Completion of roof and walls

Different terms can be negotiated with lenders but it’s important to determine exactly where each stage of construction starts and finishes so that developers can be absolutely sure when the next injection of cash will be released. Matching a construction loan with the cash life cycle of the construction project ensures that cash doesn’t run dry and there are no unnecessary delays.

Our Take on Australia’s Construction Industry in 2023 and How Alternative Financing Options Will Become Increasingly Important

The Pandemic Recovery Construction Timeline

2020

In April 2020, Australia’s PCI (a seasonally adjusted national index based on activity, orders, deliveries and employment in construction) contracted more than 20 points, representing its lowest-ever value and wreaking havoc over the construction industry. Despite this retraction, it was widely expected construction would recover in the years to come.

In fact, it was speculated that as western countries got to grips with the pandemic, the  global real estate boom would also lead to a construction boom.

2021

2021 was a very volatile year for the construction industry as a whole. After signs of growth to start, Australian PCI fell by 6.8 points to 48.7 in July 2021, recording the first fall into contraction since September 2020 (PCI readings below 50 indicate a retraction and readings above 50 indicate an expansion in activity, with higher results indicating a faster expansion). In August 2021, PCI fell a further 10.3 points to 38.4 – its largest decline in a year due to strict COVID lockdowns. At the time, Ai Group’s head of policy Peter Burn said the results are in stark contrast to the beginning of 2021.

“Australia’s construction sector has shifted from healthy expansion to steep contraction in a flash as restrictions in the face of COVID-19 outbreaks have closed sites and disrupted supply chains.” 

When the strict lockdowns came to an end, PCI recovered by 14.9 points to reach 53.3 in September 2021. 

2022

The following year saw an almost reverse pattern to 2021. By May 2022 Australia’s construction industry had experienced a period of continued growth a with a PCI score of 50.4. 5.5 points lower than the 55.9 score in April 2022 but maintaining a 4-month trend of the construction industry continuing to expand (albeit at a slower speed in May).

However, much of the recovery was driven by residential development and commercial construction continued to face strong headwinds. Unfortunately, 4 months of growth was swiftly followed by 6 months of continued contraction in the period of June through November.

In the November announcement, Peter Burn commented “Activity in the Australian construction sector was mildly weaker in November on the back of two positive developments. Reduced absenteeism due to illness improved labour availability and supply chain disruptions eased. However, the industry remains in mild contraction, and wage and input costs remain elevated and are still growing. The cumulative effect of interest rate rises and increased economic uncertainty poses concerns for the industry looking forward.”

2023

After a sustained period of contraction in the second half of 2022, Australia’s construction industry experienced a small recovery in December 2022 and January 2023 but this recovery was very much short lived. February to May 2023 marked even further contraction for the industry and only in the latest figures published in June 2023 did we see the construction sector expand.

Inflation in Australia is continuing to put upwards price pressure on raw materials and wages, whilst unemployment is also creeping up. The move by the Reserve Bank of Australia to hold the cash rate at the same level in July 2023 should provide some relief to construction firms.

Source: https://www.aigroup.com.au/

The future of Australia’s commercial construction industry continues to look uncertain. There is expected to be an incremental uplift in industrial building, but it’s thought this will be offset by falls in the construction of new offices, retail units and accommodation.

Materials costs have risen sharply, skilled tradies are becoming harder to find, and the cost of labour is rising. With inflationary concerns, interest rates have been on the rise. This rise has softened demand while also raising the cost of doing business.

Experts believe that inflation might just start to be peaking in Australia and the move by the RBA to hold the cash rate at existing levels in July 2023 would suggest they believe the same. This could mark a period where many construction businesses in Australia seek to refinance their debt. Non-bank construction financing may prove crucial in the years ahead.

Lend, Australia’s biggest online loan matchmaker, is constantly building up its list of lending partners in this specific sector of construction finance.

Commercial Construction Loans Comparison & What To Expect

If a business has a concise construction plan, including construction timelines, a realistic cost assessment and a good credit history, it is possible to secure construction finance in as little as 24-48 hours. If a project is considered more risky or larger in scale then financing can take a little longer. That’s not to say it’s not possible though as one of the biggest benefits to commercial construction financing is it can allow businesses to take on larger projects and reach a new level.

Construction loans rates vary depending on the scope of the project and the individual risk profile but most lenders will be happy to provide a loan around 80% of the LDCR or 70% of GDV if approved. Like other business loans, construction loans can come with arrangement fees, early-exit fees and valuation fees if necessary. That is why it’s important to compare small business loans providers.

Commercial Construction Loan: In Practice

As touched on, there are generally two valuations that can take place – one for the land value and construction cost (LDCR) and the other for the completed sale value (GDV). As you would expect the GDV is usually higher than the LDCR.

Unfortunately, lenders usually base their loan amount on LDCR, i.e. purely the construction costs and not the resale value. Though this is not a hard and fast rule and specialist construction lenders, who are experienced in conducting thorough valuations, may also provide loans based on GDV. If a developer has a strong track record of completing projects and repaying construction loans, this will certainly work in their favour for getting loans approved based on GDV.

Let’s look at an example; if the land costs for a new apartment building are $1 million and the cost to build residential units is $4 million, then the total build cost will be $5 million.

If a bank works to an 80% cost to development ratio then they will offer the developer up to $4 million.

However, if at the end of construction there’s a 20 unit block, selling at $400,000 per apartment, the final gross development value could actually be $8 million. If the developer is able to find a specialist commercial construction lender who provides up to 70% of the GDV then they would be able to borrow up to $5.6 million.

In this scenario, unless the developer has $1 million cash at hand, or other investors willing to provide capital, they wouldn’t have been able to afford the $5 million total build cost through a loan based on LDCR.

Whatever type of construction loan is requested, an independent valuation with a certified representative of the Australian Property Institute will be required. This is likely to cost anywhere between $5,000 – $10,000.

There are various factors that valuers will consider but just a few include; the size of each unit, the spec to which they will be developed and how similar properties have sold for in the region.

Types of Properties Eligible for a Commercial Construction Loan

Commercial construction loans can be used for a variety of property types. These include:

• Industrial property
• Retail property (restaurants/shops)
• Commercial office buildings
• Warehouses
• Medical centres
• Accommodation (hotels/student halls)
• Educational facilities (schools/colleges)
• Farms

The type of property you’re planning to construct can influence the terms and conditions of your loan, so it’s important to discuss this with your lender or broker.

Is Security Required For Commercial Construction Financing?

The property that is being built or upgraded in the construction project will act as security in the financing process. Very rarely will developers have to provide additional forms of security for a construction loan. 

Construction Invoice Factoring

Construction invoice factoring works just like any other form of invoice finance. The facility allows construction companies to access money from unpaid invoices prior to the original due date, albeit at a small discount. The reason many lenders specifically call it ‘construction invoice factoring’ is that it is particularly useful for construction companies, as the industry traditionally settles invoices much slower than other industries.

Construction invoice factoring essentially allows borrowers to advance the majority of their incoming receipts, usually around 80-90% of the value of the unpaid invoices that they are expecting to receive for completed jobs. This way, borrowers don’t have to wait the full 30, 60 or 120 days for payment. Once the payment terms are up and the lender receives the full value of the invoice, borrowers will receive the rest of the unpaid balance of the invoice, less the lender’s fees.

Having immediate access to cash allows construction firms to pay staff, purchase raw materials, hire equipment and pay their own suppliers. It may be that construction firms can even outsource the account receivables process, freeing up time to focus on construction and less time chasing invoices. The solution is also scalable because as the size of a company’s invoices grow, naturally the amount they can receive through commercial invoice factoring grows too. Borrowers won’t have to worry about outgrowing and renegotiating any debt facilities they have with their existing lenders.

Alternative Forms of Commercial Construction Financing 

There are a variety of other financing solutions available which can be of a major help to construction firms. If a firm needs additional equipment, such as construction machinery or company vehicles, then equipment financing could be an appropriate solution.

Other types of finance, including unsecured business loans can also be used to raise money for construction projects. However, business owners will need to check if the repayment terms are suitable for a project that will not generate income for some time.

Final Words: Are SME Commercial Construction Loans Viable?

For businesses operating in the construction and building industry, it is of vital importance to keep consistent cash flow throughout a construction project. Man hours, machinery costs and raw material costs are pre-planned but inevitably projects will sometimes go over budget. Being unable to finish a project can have dire consequences on revenue and the reputation of the business.

Commercial construction loans can be of a huge benefit in maintaining cash flow throughout a project and in growing a business to levels never achieved before. For some construction firms or particular projects it can be difficult to attain dedicated construction loans so it may prove worthwhile considering alternative forms of construction financing such as unsecured business loans or equipment financing. If a developer has a number of unpaid invoices from previous construction projects then construction invoice factoring could easily generate cash flow right away.