Credit underwriting is more reliant than ever on Big Data, and one of the industries in which this is most pronounced is the construction industry. Lenders have to mitigate risk on complicated building projects with lengthy timelines and a crowded supply chain that stretches far beyond the direct borrower.
Plus, the construction industry today is complicated by delayed and late payments to contractors, sub-contractors and suppliers, while payments also face additional friction by the manual process of lien waivers, which confirms parties on a project have received payment and therefore have waived lien rights to the owner’s property.
Chase Gilbert, CEO of construction FinTech firm Built Technologies, told PYMNTS that this web of intricate connections creates a Catch-22 when it comes to lending: Lenders, which pay out loans incrementally based on progress of a construction project, have to see that progress in order to provide financing. But construction companies need financing in order to make progress on a project.
“Construction loans are a bit unique in that they are funded over time as an asset is being built,” he explained, “whether that’s an office building, a stadium or a skyscraper. It doesn’t matter. It’s the lender’s way of mitigating risk and ensuring every dollar that goes out the door is going to where it’s supposed to go.”
Lenders need access to a lot of information about an ongoing project, but this process is typically very manual, slowed down by emails and phone calls back and forth, said Gilbert. It’s not only a challenge to the financier, but for borrowers as well, who have to coordinate across a web of stakeholders on a project.
“It starts a domino effect,” said Gilbert. “There’s a chain reaction that occurs.”
The sluggish flow of payments through the supply chain on a construction project also heightens the pressure on owners to gain the financing they need to push construction forward. Research released in 2017 from the Federation of Master Builders found two-thirds of SMBs in the construction sector aren’t paid within the standard 30-day timeframe; nearly a quarter said they typically wait more than four months to get paid by contractors.
This is a massive point of friction in construction lending, and a few FinTechs have emerged with a focus on addressing manual processes of B2B payments and lien waivers. Built Technologies is coming at it from another angle, Gilbert said.
“The root cause is the lender-to-owner/borrower relationship,” the CEO noted. “If we can expedite that flow of funds [to the borrower], it allows the flow to accelerate from the owner to the contractor. In the vast majority of cases, contractors don’t have the working capital in their bank account to pay all of their subcontractors out of pocket and wait to be reimbursed from the owner. If we can accelerate the very top of that chain, from lender to owner, then it would accelerate the flow of cash from owner to general contractor, and so-on.”
“If we can use data to help lenders feel the loans they’re making are safer or performing better, then it accelerates construction payments and allows the whole value chain to improve,” he added.
In its latest effort to address this issue, Built Technologies announced this week a partnership with Baker Hill. Gilbert said Baker Hill is a complimentary partner, with its NextGen lending and risk management capabilities able to enhance Built Technologies’ own lending technology designed specifically for the construction space.
The partnership, Gilbert added, is also part of Built Technologies’ broader initiative to focus on FinTech collaboration and data sharing.
In Gilbert’s view, there are three categories of FinTechs today: integration-intolerant, integration-tolerant and integration-friendly.
“We fundamentally believe that the future of the industry is for those that are integration-friendly,” he said. “In some cases, that can mean a technical integration; in other cases, it’s that two solutions fit nicely together.”
With so many stakeholders on a single project coming into play in the loan decision and payout process, frictionless movement of data throughout the supply chain and between borrower and lender is paramount. As with many areas of financial services, and lending in particular, data sharing is rarely so easy though.
“Data utilization is a huge initiative for us,” he said, “whether it be enriching data with other data sources to tell a more holistic story or, in some cases, using data to help others make better decisions, like benchmarking. Data can be anonymized to let lenders understand ... turnaround time versus their peers. It’s elementary but not possible today, because no one is tracking the data.”
But Gilbert said the construction space is in the midst of a data revolution that can jumpstart the sector’s ability to better share and manage information.
“We have the opportunity to take a segment of the construction lending industry and take it from having very little visibility and digitization and actually [skip] multiple generations of tech advancement, which is pretty unique,” the CEO continued. “I’ve compared it internally to certain countries that went from having little infrastructure in place to, because of wireless technology, immediately having leveled the playing field with the baggage of legacy infrastructure.”
Beyond data sharing, Gilbert added that this industry has to focus on collaboration between the industry-specific FinTech solutions being designed today.
“What’s exciting is that there is so much activity happening in construction tech and FinTech, including tech specific to construction lending,” the CEO noted. “What we’re going to see is a lot of people picking different aspects of the industry and digitizing operations. Many of these companies are taking an integration-friendly approach.”
“I think construction can move quickly into the digital age,” he added. “But the only way it’s going to happen in such a large and complicated industry is if different groups play nice together.”