Construction Financing Models

“Construction Financing For Builders And Developers Evolves Over Time”

For most builders and developers, the starting point for construction financing finds its roots in private mortgage financing.

As the builder or developer find success in the market, they may even incorporate mezzanine funding sources to expand faster and acquire more leverage for each project they pursue.

And at some point, a model for financing is in place and somewhat perfected with one or several different sources for financing.

In other cases, there is a construction financing model in place, but the builder and/or developer have a desire to continue to expand the model to 1) gain more access to capital, 2) increase leverage of existing equity; 3) lower the overall cost of debt, 4) diversify financing sources.

To continually work towards these goals, the builder or developer must maintain somewhat of a pliable business model to be able to adapt to the requirements of different lending or investing groups they may want to try and bring into the mix.

On the surface, all of this makes a great deal of sense to pursue for a growing company committed to being in the development business for years to come.

But in many cases, the builder or developer achieves a less than desirable level of business operations due to the constraints imposed by the amount of construction financing that can be secured at any point in time.

The reason for this is the same other capital intensive businesses do not achieve their growth and scale goals and that is a lack of understanding of how to collectively go about achieving the 4 goals listed above.

Builders, developers, and business owners in general work under the assumption that a lender or investor will change their business model to fund a construction business model. That having a good, solid, profitable business will be enough for a lender or investor to see their way clear to find someway to lend them money.

But that’s also like saying that the laws of physics that apply to engineering and construction can be altered to fit the needs of the individual as they so desire.

A lender or investor business model is developed on a set of principals and criteria that have been successful over time.

The key to accessing the capital they have available is to understand their business model and lending requirements and then trying to incorporate them into the builder or developers business model instead of the other way around.

In the marketing world, the business owner is always taught to work backwards from the customer in order to have a business model that can withstand competition and deliver a profit.

In the financing world, the business owner needs to work backwards from the lender in order to figure out how to access the amount of capital they require, for the leverage, cost, and terms they are seeking.

The best way to figure out how to advance your construction financing structure is to seek the help of an experienced construction financing professional who can help you better align yourself with the sources of capital that offer the type of funding you are seeking.

Click Here To Speak With Construction Mortgage Broker Joe Walsh

1 comment
taylor says May 12, 2011

This is definitely one of the challenges we are having with our construction business.

It takes a lot of time to set up construction financing and even more time to move to another lender to replace or add to what you already have

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