Caveat loans for builders and tradespeople

Equity in the security property, as with any caveat loan. Then the business: current projects, the progress claims due and when, whether the client's bank is funding the project, any disputes with clients or subcontractors, the builder's licence and insurance status, and any ATO or supplier debt. A builder with three projects funded by bank construction loans and a clear progress schedule is a good caveat borrower. A builder with a client dispute, an unpaid supplier and a licence under review is not, because the exit depends on payments that may not come.

The lender advances against the next one or two progress claims. When the client's bank pays the claim, the builder repays. Terms are short, often one to three months, and lenders will sometimes take an assignment of the progress claim or require it to be paid to a controlled account. This is close to invoice finance secured by property, and it is usually cheaper than unsecured invoice finance for a builder with property equity.

Funding a land deposit for a spec build or the next development is a common use, with the exit being the construction loan that settles the land. Clearing an ATO debt is another, because a tax default can trigger a licence review and a director penalty notice. In both cases the lender will want to see the follow-on finance or the payment plan that provides the exit. The tax debt side is covered in detail at gettaxdebthelp.com.au.

Caveat loans to builders fail when the progress claim is disputed or the client's lender withholds a draw, and the builder cannot repay on time. Default interest then compounds a cash flow problem. Borrow against claims that are certified, not merely invoiced, keep the loan term longer than the expected payment date, and never use a caveat loan to fund an unfunded project.