Construction Financing is Facing Headwinds on Multiple Fronts

10/6/2026 - By Josh Strickland

For much of the past decade, construction firms benefited from an environment of abundant liquidity, low interest rates, and strong investor demand for new development projects. Today, however, the financing landscape looks very different. Rising interest rates, stricter bank capital considerations, and increasing regulatory scrutiny by bank regulators are combining to create significant challenges for both large-scale developers and smaller contractors seeking working capital.

The result is a construction market where access to capital has become just as important as access to labor, materials, and project opportunities.

Higher Interest Rates Are Reshaping Project Economics

Perhaps the most visible headwind facing the industry is the impact of higher interest rates. While rates have moderated from peak levels, they remain significantly above the near-zero environment that many developers became accustomed to over the last decade.

For commercial real estate projects, higher borrowing costs directly affect project feasibility. Developers must generate higher returns to justify the increased cost of debt, which often translates into higher required capitalization rates (CAP rates). As CAP rates rise, property valuations typically decline, making many projects less attractive from an investment standpoint.

This becomes particularly challenging in the multifamily sector. When investors can earn attractive returns from less risky fixed-income investments, rental housing projects must offer even higher potential returns to attract capital. Projects that appeared profitable when financing costs were 3% or 4% may no longer make sense when borrowing costs are substantially higher.

The consequence is that many developments are being delayed, resized, or canceled altogether as developers reassess whether projected rents and occupancy levels can support today's financing costs.

Banks Are Becoming More Selective

The challenges extend beyond interest rates. Many community and regional banks have accumulated significant commercial real estate and construction lending exposure over the past several years.

Bank regulators have long maintained supervisory guidance for institutions with elevated concentrations of construction and land development lending. One of the primary supervisory thresholds occurs when construction, land development, and other land loans equal or exceed 100% of a bank's total risk-based capital. Institutions approaching or exceeding that level often face heightened scrutiny regarding risk management, capital adequacy, and loan portfolio concentrations.

While these thresholds are not hard lending caps, they can influence a bank's willingnes to add new construction exposure, particularly large development loans that could materially increase concentration levels. In practical terms, many banks simply have less capacity than they did a few years ago. A single large construction project can represent a significant addition to a bank's existing portfolio concentration. Even if the project is well structured and backed by experienced sponsors, lenders may hesitate because of balance sheet constraints rather than project quality.

The Impact on Large Development Projects

For developers seeking financing for ground-up construction, these market conditions create several challenges:

  • More equity is often required from sponsors.
  • Loan-to-cost ratios may be reduced.
  • Interest reserves receive greater scrutiny.
  • Preleasing and presale requirements are becoming more stringent.
  • Approval timelines are often longer.

We have seen developers who previously relied on one bank relationship are now borrowing from multiple banks and some are seeking alternative capital sources, including debt funds, private credit providers, and institutional investors. While these alternatives can be effective solutions, they frequently come with higher pricing and more restrictive terms.

Smaller Contractors Feel the Pressure Too

The financing challenges are not limited to large developers. Small and mid-sized contractors are increasingly finding it difficult to secure working capital facilities and lines of credit. Construction businesses often experience significant cash flow timing mismatches. Payroll, subcontractor costs, equipment expenses, and material purchases must typically be paid well before owners release retainage or final project payments.

Historically, revolving lines of credit helped bridge these timing gaps. Today's environment, however, presents several obstacles:

  • Increased Cost of Borrowing: Variable-rate lines of credit have become substantially more expensive given the current interest rate environment. Interest expense that was once viewed as a manageable overhead cost now materially impacts profitability on many projects.
  • Greater Underwriting Scrutiny: Banks are taking a closer look at contractor financial statements, backlog reports, work-in-progress schedules, and customer concentrations. Lenders want greater confidence that borrowers can withstand project delays or cost overruns.
  • Reduced Appetite for Risk: Some institutions that remain active in construction lending are prioritizing their strongest and most established customers. New borrowers, younger firms, or contractors with limited liquidity may find themselves facing more questions and fewer financing options.

Cash Flow Management Is Becoming a Competitive Advantage

In this environment, contractors that demonstrate strong financial discipline are separating themselves from their competitors.

Lenders increasingly look for:

  • Consistent profitability.
  • Strong working capital positions.
  • Accurate job costing systems.
  • Reliable work-in-progress reporting.
  • Diverse customer bases.
  • Experienced management teams.

Contractors that can produce timely financial information and clearly demonstrate their ability to manage project cash flows often have a greater chance of securing financing, even in a tighter credit environment.

Alternative Financing Sources Continue to Expand

As traditional bank financing becomes more constrained, alternative lenders are filling portions of the gap.

Private credit funds, asset-based lenders, equipment finance companies, and specialty construction finance providers have become more active participants in the market. While these solutions can provide valuable liquidity, businesses should carefully evaluate the higher costs and potentially more restrictive covenants that frequently accompany non-bank financing.

For some contractors, the right answer may involve a combination of traditional banking relationships and alternative capital sources.

Looking Ahead

The construction industry has always been cyclical, and today's financing environment is another reminder that access to capital can be just as critical as project demand. Higher interest rates continue to pressure project economics, particularly in commercial and multifamily development. At the same time, many banks are managing sizable construction loan portfolios and monitoring regulatory concentration thresholds, limiting their ability or desire to add significant new construction exposure.

For developers, this means more selective project financing and greater equity requirements. For contractors, it means increased scrutiny when seeking lines of credit to smooth cash flow cycles.

The firms that thrive in this environment will likely be those that maintain strong balance sheets, invest in financial reporting capabilities, and build long-term relationships with capital providers before financing is needed. In a market where credit is becoming more selective, preparation and financial discipline may be the most valuable construction tools available.

Need to Prepare for Your Next Financing Conversation?

A strong financial position can make a difference when lenders are evaluating your construction business or next project. Our construction team works with contractors and developers to strengthen financial reporting, improve cash flow visibility, and prepare for the questions lenders are asking today.

Talk with our construction team to explore how stronger financial insight can help you navigate a changing financing environment.

About the Author | Josh Strickland, CPA
Josh is a partner with experience across audit, accounting, and advisory services. He joined Saltmarsh in 2010 and has spent his career focusing on providing audit and advisory services to financial institutions. He brings deep expertise in internal audit, credit quality assessments, and advisory services focused on accounting, financial reporting, operational issues, and risk management. 

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