The construction industry is massive. It’s one of the largest sectors of the global economy representing $5 trillion in payments annually, with the US construction industry representing a $1T market. Construction payments are not only massive, but also complex, particularly construction loans. Construction loans are considered riskier than traditional mortgage loans and are thus provided in tranches (otherwise known as “draws”), rather than in upfront, lump sum payments. Construction loans also involve many ecosystem stakeholders who need to collaborate with each other, which increases complexity to an already complicated workflow. Let’s take a deeper dive into the current workflow paradigm and analyze the inefficiencies and areas of improvement in the construction loan status quo.
Key constituents in the construction loan process include inspectors, lenders, developers and general contractors. Inspectors play a critical role because they act as “gatekeepers” analyzing construction sites and determining how far along particular projects are relative to plan. Inspectors visit multiple sites per day with different surveys and documents for each project and lender. After each inspection is complete, the inspector physically sends those surveys snail mail to lenders. Upon receipt, the lender’s back office updates a financial model in Excel, completes a review and approvals process, and eventually releases the funds. Sometimes this process can take several weeks and sometimes there are more than five draws per project which can lead to months of delays. This labor intensive, slow, error-prone and non-transparent workflow process has been the industry standard for decades. Additionally, and more importantly, it creates a poor borrower experience and puts lender compliance teams at risk.
This is why we’re interested in companies digitizing the legacy process of servicing loans by moving and structuring data out of pen, paper, Excel, email, phone and into software and streamlining the loan administration process from start to finish. This productization will enable faster approvals and increased revenue for lenders and more transparency and fewer delayed projects for developers. More specifically, inspectors use a mobile app so that when he/she determines how far along a project is, his/her updates will sync directly into the lender’s back office database, reducing the amount of time it takes to approve and distribute a draw (ie no paper forms, no mail time, etc). It structures data by moving Excel spreadsheets into software, allowing lenders to analyze their entire portfolio in real time and make better data driven decisions around mitigating risk, insurance, customers and rates. Further, and for the first time, lenders can compete on customer experience (allowing developers to pay their contractors faster, get the job done faster, and start generating rent faster), something other than interest rates and other loan terms. Most importantly, it allows lenders to make more loans, charge more interest, and generate more revenue without hiring more employees nor jeopardizing compliance.
This massive market combined with major inefficient complexities provides an incredible opportunity for software startups, such as, Built in Nashville and Rabbet (fka Contract Simply) in Austin. If you’re a startup solving the inefficiencies in the construction payment ecosystem, we would love to hear from you!