Did you know that a significant number of construction projects fail due to payment-related issues? As a result, most construction loans are required to use Funds Control to manage and disburse funds. Payments are made in increments when specific certain conditions are met, and often.
Ultimately, Fund Control should:
- Ensure Proper Use of Funds: Is this money is used for the intended purposes, such as paying for labor, materials, and other project-related expenses?
- Mitigate Risk: By controlling the release of funds, the process helps prevent fraud and ensures that the project is progressing according to the agreed-upon schedule and budget. It also protects the lender by making sure funds are only released when specific milestones or requirements are met.
- Protect All Parties: Though tedious, the process can prevent disputes and even liens from being placed on the property.
- Compliance and Documentation: Thorough documentation prevents fraud. For example, it can ensure that a General Contractor (GC) does not use project funds for a different project.
Preparing for your lender requirement call is a crucial step for a construction company, as it sets the stage for securing financing and ensures that the lender has confidence in the project’s viability.
Begin with several 30 minute kick-off call prior to commencing your real estate project. One call should be between the consultant and lender to discuss any special requirements the lending institution may have. Another call should include the lender, borrower, general contractor, and third-party consultant to discuss what is needed and when it is needed.
Before phone discussions with your lender or fund control company, we recommend reviewing this list to ensure that you are prepared and your conversations are productive.
1. Understand the Lender’s Requirements
Take the time to review your notes from prior conversations with the lender or fund control company. If there are any ambiguities, clarify beforehand so that your call is more productive can prepare before your call.
Be ready to discuss your calculations. How well do you know your numbers?
2. Update and Organize Your Financial Documents
The documents and information the lender might request might include financial statements, project budgets, schedules, contracts, and permits.
- Financial Statements: Request up-to-date financial statements from your accounting team, including balance sheets, income statements, and cash flow statements. Be ready to explain any significant changes or anomalies.
- Project Budget: Ensure the project budget is detailed, accurate, and includes all expected costs.
- Cash Flow Projections: Provide a cash flow forecast that aligns with the project’s timeline.
- Construction Schedule: Additionally, you should be prepared to present a clear, detailed project schedule, including milestones and timelines.
- Contracts and Agreements: Do you know your subcontractors, suppliers? They may ask for copies of important purchase orders?
- Permits and Licenses: Ensure that all required permits and licenses are in place.
3. Create an agenda
Take control of your call by preparing a concise overview of the project, including its scope, objectives, and expected outcomes. Decide in advance who will present each part of the project and who will answer specific types of questions. You can even conduct a rehearsal with all participants to ensure everyone is on the same page and can present confidently.
Your lender will also have their own agenda. Be prepared to discuss how you’ve assessed the project’s feasibility, including market analysis, demand forecasts, and the potential for ROI. Expect questions about how you plan to manage costs, particularly with regards to overruns and unexpected expenses. Lenders will likely ask about the project timeline and what steps you’ve taken to ensure it will be met. Be ready to explain how you will ensure there is enough cash flow throughout the project to meet all obligations.
- Preparing for Your First Call: If it’s the first time you’re speaking with a lender or fund control company, highlight your company’s experience with similar projects, including any successful completions, to build credibility. Introduce key members of your project team, emphasizing their qualifications and experience. Be prepared to discuss the potential risks associated with the project and the measures you’ve implemented to mitigate them. Ensure that key members of your finance, project management, and legal teams are prepared to contribute to the call.
4. Post-Call Follow-Up
After your call, we recommend that you share a summary of the discussion with your team and memorialize key points, including any action items, additional documentation requested, and deadlines. Follow through quickly.
The information provided in this blog post is for general informational purposes only and is not intended as legal advice. Every business and financial situation is unique, and the strategies discussed may not be applicable to your specific circumstances.
For personalized guidance, please schedule a consultation appointment with a Principal at Bernstein Financial Services to help you determine your optimal planning strategies.