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Why would you need construction finance?
Whether you are an entrepreneur or an established owner of a company in the South African construction industry, your SME likely often faces unforeseen challenges that can hamper construction projects and strain working capital, leading to:
- Cash flow drying up and threatening or even halting operations
- Use of business funding that comes with high interest rates and inflexible repayment terms
- Loss of projects, clients and revenue hurting your SME’s credentials and survivability.
Whether you’re in property development, renovations, infrastructure or support services, your SME can operate more efficiently with fast access to construction finance in South Africa as a buffer against disruption.
Let’s explore the different types of construction financing and how business owners can rely on them to build a more resilient and profitable SME.
What is construction financing?
When credit providers offer funding for construction in South Africa, they refer to various types of credit that provide working capital for SMEs in the South African construction industry.
Construction project delays and late payments can have a knock-on effect on your finances, disrupting your cash flow and drying up working capital.
That’s why having access to business funding in the form of working capital is vital for construction companies that regularly need to purchase equipment and materials, as well as cover other expenses for ongoing and future construction projects.
Waiting to free up cash flow to buy the necessary inventory, pay additional staff or cover operational costs causes further delays and can put promising new prospects at risk. As a business owner, you can’t afford to let cash flow problems jeopardise your hard-earned reputation in this competitive industry.
“Construction income, by its nature, is quite ‘lumpy’, and this means access to short-term cash flow to carry costs for a couple of months is vitally important, and one of the bigger challenges facing the sector,” Garth Rossiter, Chief Risk Officer at Lula, comments.
On-demand access to working capital goes a long way in helping business owners see existing projects through completion while allowing them to take advantage of new opportunities as they arise.
Construction finance keeps your SME‘s engine running smoothly, preventing expensive shutdowns.
Why do companies look for construction financing in South Africa?
Construction SMEs need a healthy cash flow to cover the various operational expenses associated with construction work – payroll, materials and equipment – without disruptions. Below are some of the main challenges facing the construction industry in SA:
- Loadshedding and poor electricity infrastructure: The South African grid experiences frequent power outages, which can cause delays and increase costs.
- Materials costs and shortages: The construction industry often faces material shortages due to supply chain disruptions, inflation and import reliance.
- Logistics constraints: Construction work depends on a challenged road freight logistics chain that faces organised attacks and rising fuel costs. Rail and port deficiencies cause more constraints.
- Unpredictable weather events: Climate change increasingly affects the timeline of construction projects, with unexpected weather events making it harder to plan ahead.
- Labour shortages: A mismatch between the available workforce and required skills is driving up costs of skilled labour and, in turn, operating costs.
- Lack of access to funding: Access to funding remains one of the biggest challenges that South African SMEs face, with high interest rates driving up capital costs, and stringent requirements excluding many business owners from funding for construction companies.
These and other challenges seriously hamper project management, cut into profit margins, and dry up cash flow. It’s essential for construction companies to find funding solutions to mitigate these risks and ensure resilience in a challenged industry.
What can you use construction finance for?
Construction finance unlocks vital funding that enables you to avoid capital crunches, improve risk management and keep a positive cash flow throughout project cycles. Having a credit line readily available allows you to:
- Purchase construction materials (cement, steel, lumber etc.)
- Pay labour costs (employees, subcontractors)
- Rent or buy construction equipment
- Mobilise resources to the job site
- Pay for transport and logistics
- Cover overhead expenses
- Bid on and secure new building contracts
With fast access to financing, you can confidently proceed with construction work instead of grinding to a halt over cash flow shortages. Your SME stays agile and avoids missed procurement opportunities.
What are the available types of construction finance in South Africa?
There are various types of funding options available in South Africa, each with its own features and ideal uses. The main types are traditional business loans from banks and alternative funding solutions like Lula’s Revolving Capital Facility and Capital Advance.
Traditional building loans vs Lula’s Revolving Capital Facility and Capital Advance
| Traditional building loan | Lula’s Revolving Capital Facility | Lula’s Capital Advance | |
| Type of credit | One-time lump sum loan or released in phases | Replenishable line of credit | Fixed capital injection |
| Funding amount | Depends on construction project | Up to R5 million depending on SME valuation | Up to R5 million depending on SME valuation |
| Repayment terms | Fixed term | No set terms: revolving, pay only for the outstanding balance | 3-, 6-, 9- or 12-month terms |
| Good For | Funding of entire construction projects | Bridging cash flow gaps, operations, bidding on contracts | Upfront project costs like procurement (labour and material) |
| Speed of funding | Weeks or months for approval | Access to funds within 24 hours after approval | Access to funds within 24 hours after approval |
| Early repayment | Yes | No penalties, repaid amount can be re-borrowed | No penalties |
| Application | Stringent requirements and paperwork (building plans, cost estimates etc.) | Easy online application with approval within 24 hours | Easy online application with approval within 24 hours |
| Associated cost | Standard interest rates, high fees | Competitive interest rates, no hidden fees | Competitive interest rates, no hidden fees |
Traditional building loans
Building loans (and business loans in South Africa in general) are either one-time lump sums that are paid back over a fixed term, or paid in phases as the construction project progresses.
These loans require extensive documentation on the commercial property and construction work, as well as collateral and a good credit record. Loan applications can take up to months to get approved. This makes traditional business loans from banks inaccessible to many SMEs in need of flexible funding.
Banks build their business models around and channel their resources toward larger corporate accounts. As a result, credit providers can be inflexible towards SMEs’ unique needs.
Financial services providers like Lula, a dedicated South African SME funding provider, offer more efficient, flexible and cost-effective funding for construction businesses – whether it’s the financing of construction waste management in South Africa, the construction of roads, or the renovation of commercial property.
Lula’s answer to construction finance
Lula’s Revolving Capital Facility is a flexible line of credit that construction SMEs can tap into as needed. Withdraw funding as expenses arise, only paying for what you use. Repay a portion and the full amount revolves back for future use. This product is ideal for bridging cash flow gaps, bidding on contracts, and managing operational costs.
Lula’s Capital Advance provides a fixed capital injection with repayment terms from 3-12 months. It can help with the procurement phase and act as a shorter-term building material loan, as well as a fund to cover labour costs, equipment rentals, and other upfront expenses.
Compared to traditional loans, Lula's funding provides:
- More functionality for SMEs
- Faster access to capital
- No penalties for early repayments
- No hidden fees
What are the pros and cons of construction finance?
Like any financing solution, construction loans come with pros and cons to consider. Below are the most important ones:
Pros of construction finance
- Easier application: Construction finance from SME funding providers has less stringent requirements than business loans from traditional banks.
- No fixed repayments terms: Unlike traditional business loans that require monthly repayments and come with early repayment fees, construction financing can be an open line of credit and settled early without penalties.
- Lower cost of capital: Interest rates on Lula’s construction finance vary but are usually lower than other forms of credit – especially credit cards (which are the closest financial product to revolving credit facility). Paying off a loan early further lowers the cost of capital.
- Quick access to funds: Traditional loans take weeks to get approved and funded. With construction financing, funds can be accessed in 24 hours after a fast approval process. Lula’s Revolving Capital Facility is accessible in only 2 hours once the credit line has been set up.
- Better risk management: Construction financing bridges cash flow gaps to keep construction projects moving forward without stoppages or delays. It maintains solid working capital levels for business resilience against unexpected costs.
- Bigger competitive edge: With ready access to construction financing, business owners are more agile in the procurement phase and can take on jobs faster by having working capital to scale.
Cons of construction finance
- Need to qualify: While it’s easier to apply and get approved for construction finance from financial services providers like Lula, SME business owners still need to meet certain criteria, which include having been in operation for at least a year and with an annual turnover of R500,000.
- Some loans have fixed repayment terms: Some construction financing options have fixed repayment schedules that don’t match cash flows and penalties for early repayment.
- Potential to overleverage: As with all financial products, construction financing comes with risks and should be used wisely. Prolonged payment of interest rates can reduce profitability and collateral can be seized if loans are not repaid.
What are the costs of using construction finance?
All types of financing plans come with associated costs that business owners should factor in when assessing their financials. Construction finance can be a very cost-effective form of business loan.
Cost of flexible construction finance
Lula’s business funding solutions are tailored to construction SMEs, leading to lower capital costs and better cash flow management (saving further on operational costs) than possible with traditional loans.
- Monthly repayment costs on a Revolving Capital Facility are typically 2-6% for the first 1-4 months, then 2% for the remaining months. There are no early repayment fees and no monthly account or admin fees.
- Repaying early keeps total paid interest down and can be a massive cost-saving strategy.
- Lula’s Capital Advance, on the other hand, is a fixed-term line of credit with repayment terms between 2-12 months and with transparent costs. The funding comes with similar interest rates as their revolving capital and can be costly when used as a traditional loan.
- But unlike traditional loans, capital advances can be paid back early without penalties – making this type of construction financing more flexible and potentially cheaper.
Cost of traditional business loans
Traditional business loans often come with significantly higher costs. Whether from big banks or companies financing road construction projects in South Africa, these loans come with costs, fees and other requirements:
Business loans in South Africa typically have interest rates higher than the prime rate, which has hovered between 7-12% in the last five years. These interest rates vary depending on the lender and the SME’s risk profile.
Some lenders charge a one-time initiation or application fee, which is usually around 1-2% of the loan amount.
Credit providers may charge a monthly service fee for the duration of the loan.
If the business owner pays off the loan early, there is often an early repayment fee charged.
Besides these costs, many business loans in South Africa require the business to provide collateral (equipment, real estate, vehicles, or inventory) which the credit provider can seize if the loan is not repaid in time and in full.
Lenders may also require business owners to provide personal guarantees, putting homeowners and personal assets at risk if the SME defaults on the loan.
What are the requirements for accessing construction finance in South Africa?
Qualifying for construction finance can be hard when you apply for a commercial building loan with a traditional bank. These loans are mostly used to finance the expected costs of large projects. They don’t suit the needs of small SMEs facing cash flow disruptions.
Lula’s Revolving Capital Facility is a cost-effective and flexible financing solution that meets constructors’ needs.
In order to qualify for funding for your construction business from Lula, you need to be:
An established South African business
Operating for at least a year
Generating at least R500,000 in annual turnover
The loan application requires the following documentation:
Proof of business registration
Recent bank statements
Reasonable credit history
Construction plan or revenue projections
Collateral (depending on the application amount requested)
Personal guarantee (in some cases)
How can you quickly apply for construction finance?
Is your construction SME facing late client payments or other cash flow challenges? Then you need fast access to flexible funding.
Accessing construction funding shouldn’t be complicated or time-consuming. We understand the construction industry, which is why we’ve simplified the application process to quickly give you access to the funds you need.
Lula’s Revolving Capital Facility provides construction SMEs with flexible, on-demand access to cash to ensure your business can continue operating in challenging circumstances.
The application process is easy, online, and approval given within 24 hours. This is the application process:
Apply online in minutes.
Lula assesses the application and provides a commitment-free quote.
If accepted, the funds are transferred to the chosen bank account in 24 hours.
We ensure that we provide you with:
Easy access to funds
You can easily open an account to apply for Lula’s Revolving Capital Facility and link your bank account for quick assessment. Our financial experts will then conduct a real-time evaluation by real humans of your construction business.
Fast access to capital
Complete your application in a few minutes and receive funds into your account within 24 hours after we approve your application.
Flexible access to capital
No need to worry anymore about cash flow disruptions. With a revolving capital facility, you only use capital when you need it and repay later.
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