Construction loans: funding your building projects

Construction loans are short-term business loans designed to fund the building, renovation, or expansion of property projects. They provide capital for costs like land, materials and labour, with funds released in stages (often called drawdowns) as the project progresses. Unlike a standard mortgage that finances completed property, a construction loan ensures cash flow during the build. This makes it ideal for contractors, developers or small businesses who want to erect new buildings, refurbish existing premises or bridge finance gaps in a construction project.

A construction loan is generally secured against the property being built. You borrow a large portion of the project’s cost (often up to 70–80% of the gross development value) and usually make interest-only payments during construction. Once the project is complete, the loan is repaid by either refinancing into a longer-term mortgage or by selling the finished property. Because these loans carry higher risk, interest rates are generally higher than regular mortgages, and most lenders require a significant deposit (often 20–30% of project costs) upfront.

Construction loans work by disbursing funds in milestones. At agreed points (for example, foundation completion or roofing), the lender releases the next tranche of funds. You only pay interest on the amount drawn, not the full loan amount. This staged funding helps manage cash flow and avoids over-borrowing. In practice, this means a contractor might draw initial funds to start work, then claim further drawdowns at key stages.

When do businesses need a construction loan?

Small businesses often take construction finance to:

• Build or renovate premises. Fund new offices, shops, or factories on undeveloped land or upgrade existing buildings.

• Expand operations. Add on to existing facilities or convert unused space for business use.

• Buy land and start early costs. Cover deposits on land purchases, planning permissions or initial site preparations.

• Bridge funding gaps. Cover construction costs during delays or before securing long-term finance or project sales.

The Alternative Business Funding guide notes that construction loans let a business take on much larger projects than it could with only on-hand cash. For example, a retailer might use one to build a larger warehouse instead of leasing more space, or a developer may finance a multi-unit project that would be out of reach without staged funding.

Eligibility and requirements for a construction loan

To qualify, lenders look closely at both your business and the project. Key factors include:

• Strong business credit score. Lenders rely heavily on your commercial credit profile to gauge risk. A good credit score signals reliability and can secure better rates. (Check your score free on Capitalise to boost your chances.)

• Down payment and collateral. Most construction loans require you to invest 20–30% of the total build cost upfront. Lenders often take the property or land as security until completion.

• Detailed project plan. You’ll need approved plans, budgets, and timelines. Lenders want assurance the project is viable, so be ready to show cost estimates, schedules and builder credentials.

• Business track record. If you’re a first-time developer or your business is new, expect stricter terms (as noted by Iwoca, first-timers may face higher fees and slower approvals). Demonstrating experience with similar projects will help.

• Financial health. Expect to provide financial statements, cash flow projections and information on any existing debts. Lenders assess debt-to-income and cash reserves. A ratio below about 45% is preferred.

Because construction is considered a higher-risk sector, many traditional lenders — particularly high street banks — tend to have stricter lending criteria or limited appetite for this type of finance. As a result, businesses often explore specialist or alternative finance providers that better understand the construction industry’s unique cash flow patterns and project-based nature. These can include challenger banks such as Allica Bank, or Fintech lenders like iwoca, which have developed more flexible lending models to support smaller developers and contractors. Accessing a wider network of lenders and comparing offers increases the chances of finding terms that suit your project’s timelines, repayment structure and risk profile.

Construction loans' interest rates & terms

Construction loan rates tend to be higher than standard mortgages due to the build risk. Industry reports show rates typically range from 4% to 12% depending on your profile and project. Loans are usually short-term (6–24 months) to match project timelines, with options to extend if needed. You’ll mostly make interest-only payments during construction; the full principal is repaid at the end when you refinance or sell. In some cases you might roll the loan into a mortgage (a “construction-to-permanent” loan) once the build is complete. Be aware of additional fees too: many lenders charge arrangement fees, legal costs, valuation and drawdown fees, and possible early repayment penalties.

How to apply & get the best deal for your loan

Start by assessing your needs: determine how much you need and what stage payments you anticipate. Then shop around. Because so few lenders offer construction loans, a broker or marketplace is ideal. You can apply through Capitalise with one online form – our platform then checks your eligibility (using your business credit score and finances) and submits to multiple lenders at once. A funding specialist will guide you on documentation and negotiating terms. In addition to construction finance, you might consider other options: for example, development finance (for large multi-unit projects) or a bridging loan (short-term funding between property purchase and longer-term loan). Capitalise also offers standard business loans that may suit smaller builds or cashflow needs, although these come as lump sums rather than staged draws.

Why use the Capitalise platform for a construction loan

Capitalise’s platform matches you with the right lenders from a network of over 100 (and growing) UK finance providers. This means you’re not limited to one bank’s criteria – if one lender says no, dozens of others might. A dedicated funding specialist will help tailor your applications. We also integrate your business credit score and cash flow data to speed approvals. In short, our marketplace is like having a construction loan broker: we leverage relationships with specialist construction and property lenders so that you get the best terms.