U.S. construction is in the midst of a roller coaster of disruption. Demand is surging as a supply squeeze has led to a spike in home prices and work-from-home requirements have professionals investing in renovations.
Meanwhile, supply chain bottlenecks have caused the prices of raw materials like lumber to spike and then fall, while the industry continues to struggle with some of its longest-standing pain points, including the common reliance on paper-based workflows that can create painful B2B payment delays.
Demand for building is on the rise, and these projects need financing, but for construction lenders to juggle the myriad factors influencing borrowing needs and risk profiles is no easy feat.
Land Gorilla CEO Sean Faries said pandemic-related trends have compounded upon factors that have been in the works for decades, all contributing to an environment in which building and remodeling is absolutely necessary, yet continues to face roadblocks. Access to the capital required to fuel that construction is among the most challenging to overcome, and yet, as he told PYMNTS, it remains key to keeping cash flowing from builders to suppliers, contractors and subcontractors.
Both the construction and the traditional financial services spaces have struggled to modernize quickly, but Faries said these industries are “experiencing their revolution as we speak into the digital world.”
That’s good news for construction lending, but having the ability to track the various disruptions and market shifts that impact borrower demand and risk profile cannot be achieved by digitization alone.
Collaborating with a third party that offers the industry expertise needed to manage a construction loan can be a valuable strategy, and Land Gorilla has positioned itself to operate even more seamlessly with lenders through a partnership with Jack Henry, whose banking clients can now wield Land Gorilla’s loan management technology in a more efficient and embedded way within the back office.
That efficiency is imperative for lenders to obtain visibility into the construction arena.
“When you involve third parties like construction lenders, who are not there on the job site watching, who is providing that oversight?” said Faries. “That’s really where it gets complicated.”
Traditionally, there have been three facets that lenders use to mitigate risk: physical, financial and legal. Before funds are disbursed, lenders must gain a clear view into the property being built and ensure it is free of liens. In addition to making sure that the necessary construction is being performed, these lenders must also be confident that the work has been done correctly and compliantly.
Today, Faries noted there is a fourth area of interest that construction lenders must prioritize: reputational risk, which can be impacted by slow disbursements or a friction-filled process for the borrower.
The speed with which funds are disbursed has become an increasingly influential component of a lender’s reputation thanks to the pressure on the construction industry to overcome supply chain issues, meet with intensifying demand for inventory and supply, and remedy the B2B payment delays that have long plagued suppliers, contractors and subcontractors.
Faries highlighted how common it can be for a vendor to have to wait as long as 120 days to receive payment — if payment is ever received at all.
“Being able to compress those payment times down from months to days is something really impactful in the industry,” he said, pointing to the ability for a third-party loan management solution like Land Gorilla to accelerate loan disbursements.
That speed is the result of application programming interface (API) integrations and system connectivity at the infrastructure level, as well as industry-level expertise to help construction lenders understand the market, assess their risk appetite appropriately, and proceed with confidence. As builders hustle to address a housing shortage and keep pace with remodeling demands, lenders, too, will have to accelerate their digitization efforts to understand risks and optimize the borrowing experience.
Doing so can have a profound impact not just on builders’ ability to finance projects, said Faries, but on empowering the industry to smooth the cash flow lumps and payment delays down the line.
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