Bank loans are one of the most common sources of financing for construction projects. However, securing a bank loan can be a challenging and time-consuming process for construction companies, as they have to meet various criteria and overcome several obstacles. In this blog post, we will explain some of the common difficulties that construction companies face when applying for bank loans, and provide some tips and best practices on how to prepare a strong loan application. We will also highlight the benefits of obtaining bank loans for construction projects, and how they can help you achieve your business goals.

INTEREST RATES CAN BE HIGHER THAN EXPERIENCED BEFORE

One of the main difficulties that construction companies face when applying for bank loans is the high interest rate that they have to pay, at least, compared to the generally lower rates that consumer loans charge. Construction projects are considered to be risky and uncertain by banks, as they involve many variables and contingencies that can affect the outcome and profitability of the project. Therefore, banks charge higher interest rates to construction companies than to other industries, to compensate for the higher risk and lower collateral value.  

STRICT REQUIREMENTS

Another difficulty is the strict requirements that banks impose on construction companies, such as having a positive cash flow, a low debt-to-equity ratio, and a proven track record of successful projects. 

LONG LIST OF REQUIREMENTS AND INFORMATION REQUIRED

Banks may also require construction companies to provide detailed information about the project, such as the scope, budget, timeline, contracts, permits, licenses, and feasibility studies, especially if the construction project will generate long term income for the company.

PERSONAL GUARANTEES/SURETIES ARE STANDARD

Moreover, banks will ask for personal guarantees from the owners or directors of the construction company, or for additional security from third parties, such as subcontractors, suppliers, or customers. This is standard for corporations who are not in the top 1000 of Philippine Corporations. 

LONG PROCESSING TIMES

A third difficulty is the long processing time that banks take to review and approve loan applications. Construction projects often have tight deadlines and require timely funding to start and complete the project. However, banks can take weeks or months to evaluate the loan application, conduct due diligence, verify the documents, and disburse the funds. 

This can cause delays and disruptions in the project execution, and increase the costs and risks for the construction company.

Tips and Best Practices on How to Prepare a Strong Loan Application

To overcome these difficulties and increase the chances of securing a bank loan for your construction project, you need to prepare a strong loan application that demonstrates your ability and willingness to repay the loan, and the viability and profitability of your projects. 

Here are some tips and best practices on how to do that:

  • Have a clear and realistic business plan that outlines the objectives, strategies, and milestones of your project, and shows how you will use the loan funds, generate revenues, and repay the loan.
  • Have a solid track record of successful projects that showcase your experience, expertise, and reputation in the construction industry, and prove your reliability and credibility to the bank.
  • Have a positive cash flow that demonstrates your ability to generate sufficient income to cover your expenses, debts, and loan payments, and to cope with any fluctuations or emergencies in the project.
  • Have a low debt-to-equity ratio that indicates your financial stability, solvency, and leverage, and shows that you have enough equity to support your project and loan.
  • Have sufficient collateral that can secure your loan and provide assurance to the bank that you have something of value to forfeit in case of default or failure.
  • Have a strong team that consists of qualified and experienced professionals, such as architects, engineers, managers, contractors, and consultants, who can deliver the project on time, on budget, and on quality.
  • Have a comprehensive risk management plan that identifies and assesses the potential risks and uncertainties of your project, and provides mitigation and contingency measures to minimize or eliminate their impact.
  • Have a clear communication and reporting system that enables you to keep the bank informed and updated about the progress and status of your project, and to address any issues or concerns that may arise.

BENEFITS  OF OBTAINING A BANK LOAN

– Flexibility: 

Bank loans offer flexibility in terms of the loan amount, duration, repayment schedule, and interest rate, allowing you to tailor the loan to your specific needs and preferences. You can also negotiate the terms and conditions of the loan with the bank, and request for adjustments or modifications if needed.

– Scalability: 

Bank loans allow you to scale up your project and business, as you can access larger amounts of funding than other sources, such as personal savings, friends and family, or crowdfunding. You can also use bank loans to finance multiple projects simultaneously, or to expand your operations and services.

– Credibility: 

Bank loans enhance your credibility and reputation in the market, as they signal to your customers, suppliers, partners, and competitors that you have a strong financial backing and support from a reputable institution. They also indicate that you have a high-quality and profitable project that meets the standards and expectations of the bank.

– Relationship: 

Bank loans help you build and maintain a long-term relationship with the bank, which can benefit you in the future. By repaying your loan on time and in full, you can improve your credit score and history, and increase your trust and goodwill with the bank. This can make it easier and faster for you to obtain more loans or better terms in the future, or to access other products and services that the bank offers.

Conclusion

Bank loans are a viable and valuable source of financing for construction projects, but they also come with challenges and difficulties that require careful planning and preparation. By following the tips and best practices that we shared in this blog post, you can overcome these challenges and prepare a strong loan application that will impress the bank and secure the loan. You can also enjoy the benefits of obtaining bank loans for your construction projects, such as flexibility, scalability, credibility, and relationship. If you need more guidance or assistance on how to apply for bank loans for your construction projects, feel free to contact us at ian@ianmallari.com. We are a professional and experienced team of experts who can help you with all your financial needs and goals.