Australia’s construction industry accounts for 13% of Australia’s GDP (contributing around $400 billion to the Australian economy) and provides one in ten Australian jobs*. Despite the enormous size of the biggest players, small businesses actually account for around 98% of all Australian construction companies. Some 360,000 small businesses are estimated to play their part in the construction industry and could be interested in commercial construction loans. One of the most common reasons cited for construction projects failing is due to cash flow difficulties. Small businesses don’t usually receive payment until the construction project is complete. This is where a commercial construction loan (a form of secured lending, such as asset finance) could be of use. Discovering the best construction loans in Australia can prove handy – so view our comparison below of the best options.*Based on data supplied by the Australian Construction Industry Forum in May 2022, construction accounts for 10.0% of total employment across Australia.
Why Construction Loans Make Sense with a Broker
Construction loans specifically, due to their high amount and relative sophistication as opposed to unsecured loans, unsecured line of credit, or equipment loans may better be done via a business loan broker. Brokers can help do the subtle mix-and-match necessary between the specific requirements of those seeking for commercial construction finance and lenders and banks providing it. Apply for a business loan via a brokerage specialising in construction loans, below:
Use our form to get tailored construction loans 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.
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.
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).
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:
Initial sum on loan approval
Completion of foundation
Completion of structure framing
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 2022 and How Alternative Financing Options Will Become Increasingly Important
The Pandemic Construction Timeline
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 was a very volatile year for the construction industry as a whole. 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.
Fast forward to July 2022 and we can say that Australia’s construction industry is finally starting to recover. The latest data available – May 2022 – shows a PCI score of 50.4. That’s 5.5 points lower than the 55.9 score in April 2022 but maintains a 4-month trend of the construction industry continuing to expand (albeit at a slower speed in May).
However, much of the recovery has been driven by residential development and commercial construction is still forecast to contract over the next three years. Whilst there is expected to be an incremental uplift in industrial building, this will be offset by falls in the construction of new offices, retail units and accomodation.
Materials costs are rising sharply, skilled tradies are becoming harder to find and the cost of labour is rising. With inflationary concerns, we can expect interest rates to rise. Interest rate increases will soften demand while also raising the cost of doing business. This could lead to many construction businesses in Australia trying to refinance their debt to keep afloat. 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, then 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.
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 of client invoices, albeit at a small discount. The reason many lenders will specifically call it ‘construction invoice factoring’ is they know it can be 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 jobs they have completed. So 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 its 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 obviously 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.