Builder loans: finance for small building firms

Builder loans is a broad name for the finance small building firms use to buy equipment and keep cash moving between jobs. Loans for builders fall into four groups:

• Equipment finance. Hire purchase or leasing for vans, plant, tools and scaffolding, secured on the asset itself.
• Cash tied up in work done. Invoice finance against what customers and main contractors owe you.
• Short-term working capital. Unsecured loans or advances to buy materials or cover wages before money comes in.
• Property building finance. Development finance for builders putting up or converting houses to sell.

Our construction finance guide covers the wider funding picture for the sector. This page focuses on the smaller firms and sole traders who make up much of it.

Building work puts cash out before it comes back in, and three features of the industry stretch the gap:

• Stage payments. Under section 109 of the Housing Grants, Construction and Regeneration Act 1996, a party to a construction contract is entitled to be paid in instalments or stage payments, unless the contract says the work will take, or the parties agree it will take, less than 45 days. Section 106 takes contracts with a residential occupier, such as work on a homeowner's own house, outside these rules, so domestic jobs depend on what the contract says. Either way, you fund each stage until it is paid.
• CIS deductions. GOV.UK says a contractor deducts 20% from payments to a registered subcontractor and 30% from an unregistered one, as advance payments towards tax and National Insurance. Until you reclaim or set them off, that money is not in your account. Our Construction Industry Scheme guide explains how it works.
• VAT reverse charge. HMRC says the VAT domestic reverse charge must be used for most supplies of building and construction services between VAT-registered businesses reported within CIS. Ask your accountant how it changes your VAT returns and cash flow.

Add retentions held back by main contractors, materials bought on account and customers who pay late, and a profitable builder can still be short of cash.

Most builders use asset finance for anything with a resale value. The lender buys the van or machine and you pay for it monthly, so the asset is the main security and your working capital stays free.

• Hire purchase. You own the asset once the last payment is made. Our guide to hire purchase explains how it works.
• Finance lease. You use the asset for a rental and do not take ownership in the same way.
• Refinance. Raising cash against plant or vans you already own.

For vans in particular, our van finance guide compares hire purchase, leasing and contract hire. More on the product type is in our asset finance guide.

There are two main routes, and which suits depends on whether you invoice businesses or homeowners.

Invoice finance in construction can be harder than in other sectors, because applications for payment, retentions and contra charges make invoices less certain. Some providers work with construction specifically, and some fund single invoices. Our invoice finance guide explains the basics, and our page on short-term business loans covers the loan route.

These lenders list construction, contractors or construction plant among the sectors or assets they fund, on their own sites. The table comes from their profiles in our lender directory, in alphabetical order, and is not a ranking.

• Bibby Financial Services lists specialist solutions for construction and says it typically advances up to 85% of invoice value.
• Penny funds single invoices of £500 to £500,000, names construction among its sectors, and offers spot factoring to sole traders as well as limited companies.
• Davenham Asset Finance, InterBay Asset Finance, Kingsley Asset Finance, Liberty Finance, PEAC Solutions and Ultimate Finance each list construction plant, equipment or the construction sector among what they fund. Their minimum deal sizes differ, from £1,000 at PEAC for broker deals to £25,000 at InterBay.
• Cubefunder lists construction among its sectors for unsecured loans of £5,000 to £100,000, and Swiftfund lists construction and contractors for advances of £10,000 to £1,000,000 over 3 to 12 months.

If you are building or converting property to sell, the product is development finance, not a business loan. It is released in stages as a surveyor signs off the work, and repaid from the sale or a refinance. Affirmative Finance, for example, says it lends to developers of all kinds, from established companies to smaller builders, including first-time developers. Our guide to development finance explains how lenders assess a scheme.

• How long you have traded, and filed accounts or tax returns for that period.
• Bank statements that show regular income and how you manage outgoings.
• Your order book: contracts, applications for payment and who your customers are.
• Any existing finance on vans and plant, and your record of paying it.
• Your personal and business credit, including any CCJs.
• For a sole trader, your Self Assessment returns and CIS statements.

Sole traders can usually access asset finance and some short-term lending, but fewer lenders. Our guide to sole trader loans explains what changes when you are not a limited company.

Check your funding options with Capzy, or read more guides for your trade in our industry guides. A lender's full application may involve a hard search.