compare financing options for construction projects from the

compare financing options for construction projects from the owner’s perspective. What are the advantages and disadvantages of construction loans and bond financing? When is it most appropriate to use construction bonds to finance a project?

Solution

Answer:- Comparison of financing option for construction project:-

(1)Construction loan and long term mortage:- In this plan a loan is obtained from

Bank or other financial institution to finance the cost of construction.

(2) Lease the building from a third party:- The corporate would contract to lease space in a head quarters building from a developer. This developer would be responsible for obtaining funding and arranging construction.

(3)Initiate a joint venture with local government:- Local government will help local companies with major new ventures such as new head quarter.

(4) Use corporate equity and retained earnings:- The building could be financed by directly committing corporate resources. No other institutional parties would be involved in the finance.

Advantages of construction loans:-

(i) Pay interest only.

(ii) Easy approvals

(iii) Flexible term

Disadvantages of construction loans:-

(i) Higher rates

(ii) Short term loan

Advantages of bond financing:-

(I) Borrowing money for your business can be raise your capital

(ii) Terms of debt are set forth upfront making obligation of business much clearer.

Disadvantages of bond financing:-

(i) You have to pay interest on time.

(ii) If you do not pay interest on time then you can be a defaulter.

For raising your capital ,you have to take bond financing. Company that need money for project have the option of offering bonds to public.Bonds are large number of small loans.