Understanding Builder Finance Company
December 01, 2020
As the name suggests Builder Finance is essentially the fund granted by banks and Financial Institutions to a Builder or real-estate developer for developing real-estate projects. To avail of these loans, a builder must ensure his credibility and that the project plan is robust. Builder Finances come with customizable features based on factors like project land acquisition, estimated project cost, and a detailed project assessment and valuation conducted by the financing company. The loan terms may also be customized across the project development cycle to meet specific needs. Let’s look at the various types of finances that are offered by a Builder Finance Company.
Finances offered by a Builder Finance company:
- Land Acquisition Finance: This type of loan is ideally to finance purchasing a plot of land identified for the development of a residential or a commercial construction project that’s within the limits of the Municipal Corporation. This finance cannot be availed for purchasing agricultural land, although home loans may be offered for the construction of a residential property on that piece of land.
- Construction Loan: These are normally non-recourse loans, where the project assets are held as collateral security and debt is serviced through cash flow yielded from the project. Such loans are backed by a detailed project report, company profile, project valuation report, cash flow projection, and credit history of the builder. He should be a seasoned builder who has a minimum experience of 3 projects or has completed construction in an area of 1 lakh sq. ft. Few advantages of opting for a construction loan are that the processing turnaround is quick, high chances of approval, and one can also enjoy flexible repayment terms. Loan instalments are usually disbursed in phases, based on the progress of the project.
- Inventory Financing: For building projects, ample building material must be stocked up well in time. Hence, they need to be purchased in bulk. However, the gestation period for it to transform into the finished product is very high. Unfortunately, a large chunk of working capital stays locked as stock. Loan against such inventory as collateral is availed to manage these large stocks and maintain the fluidity of the working capital. Banks and Financial Institutions finance real estate projects through this method based on a thorough stock valuation. Normally this is a short-term loan where stock details are shared with the builder finance company periodically. Some of the positive key attributes of Inventory finance is that the processing is quick, improves working capital standing, and offers flexible repayment options.
- Standard Term Loan: A builder can also source funds from a bank or an FI in the form of a Term Loan to finance his real-estate project. Mortgage of assets of adequate value (not necessarily or restricted to project assets) acknowledged by the lending entity may be required in such loans. Debt in this case too is normally serviced by cash flow generated from the project. Loan disbursement, in this case, may either happen in a single tranche or can be split into instalments, depending on the builder’s requirement.
With over 11% contribution to India’s GDP, the real estate industry sector stands at a towering position number 2 in terms of revenue generation, and it is estimated that its contribution to GDP, will continue to grow and reach 13% by 2025. Infrastructural, retail, residential, and commercial space outlay is pointing at a business of over Rs 18,00,000 crores by the next decade. The momentum sadly has been brought to a standstill due to the Coronavirus pandemic that resulted in the expiry of the moratorium period of loans worth Rs 41,884 cr. One upside is that the commercial real estate loans saw a sharp rise of 15% so far. Substantial relief has been also brought by the RBI since it allowed banks and FIs 1 year period for restructuring the loans before classifying them as NPAs. This initiative, in addition to the Rs 25,000cr real estate investment relief fund, should help ease the situation of stuck inventory, low prices, and unfinished projects. This situation is, however, being seen as a temporary problem, which is anticipated to be over soon and the Real Estate industry is expected to be as thriving as before. Banks and FI’s are already strategizing plans and widening their expertise and knowledge base to be able to meet the forthcoming demand.