Building a world-class construction lending program
The complexity of construction payments has led to major problems and pain among financial institutions, builders, borrowers, and subcontractors. With a wide array of different stakeholders on a construction project, each with a different set of priorities to protect, construction payments require extreme oversight and validation that can cost stakeholders significant time and money. Competing for these loans has also become increasingly difficult as differentiation between lenders is slim. How can your financial institution build a construction lending program that is scalable, profitable, and sustainable?
As a construction and development (C&D) lender, you are familiar with the pain surrounding construction finance. Urgent draw requests, builder errors, budget reviews, and compliance complexity are common problems that lead to department inefficiency and loss of profit. In a market fraught with problems and risk, some financial institutions leave themselves exposed, while others efficiently capture market share and generous profit margins.
How can a financial institution measure efficiency and department success? In our work with financial institutions across the country we have found the following results. The average lender spends approximately $4,880 per $1 million in volume on construction department employees. If outsourced, the lender will spend an average of $8,350 per $1 million. The best construction lenders spend $1,583 per $1 million. From this data it is clear that managing compliance, draws, and payments is better done in house rather than hiring a 3rd party fund controller. It is also clear that there are vast differences in department efficiencies that have substantial financial impact. Also, consider that the average lender hires an additional employee every $18 million in construction volume increase, however, the best financial institutions can stretch their employee hire to every $33 million. This data suggests that lenders can scale their construction loan volume with existing employees through better department efficiency. Surprisingly the gap is wide and financial institutions are leaving massive amounts of growth and profit on the table.
Is price a strategy lenders can use to compete for market share in construction lending? In order to attract the best borrowers and builders pricing should be considered and evaluated by the financial institution. However, market data suggests that there is very little difference in pricing between financial institutions in interest, fees, and LTV. In finding the happy medium on pricing, financial institutions should consider how they can reduce internal costs to minimize fee’s while achieving internal profitability goals.
Outside of competing on price, financial institutions claim the following as reasons to work with them: exceptional service, local draw processing, quick turnaround, and commitment to personal service. These claims hardly inspire a purchase decision and often times are overlooked.
Understanding the needs of your builders will make the difference for your financial institution’s reputation in the construction space. Builders want to focus their time and energy on their projects and not on a complex loan process. Adding complexity, phone calls, and problems to the builders to-do list is a sure way to lose future business. However, recognizing their needs and building an easy to use system that helps them, will help you build your construction portfolio. To win builders and clients, lenders must:
- Simplify the payment process
- Communicate payment schedules automatically
- Share project finance analysis
- Help the contractor pay subcontractors quickly
How can you as the financial institution build an efficient department, attract builders, and compete on price? We have found that the lenders that are able to build simple internal processes have the lowest costs and the best retention of builders. Introducing construction payment software is a simple way to boost your department efficiency, increase profit, and increase market share.