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abril 6, 2023

Financing for Construction in Colombia

Financing for construction in Colombia can be done through various options, including:

Mortgage loans: This type of loan is the most common way to finance the construction of a home. Banks offer mortgage loans with variable interest rates and terms that adjust to the customer’s needs.

Construction loans: This specific type of loan is used to finance the construction of a home and is granted at different stages of the construction process. Construction loans typically have higher interest rates than mortgage loans.

Savings plans: This option involves saving a fixed amount of money monthly for the construction of a home. Banks usually offer savings accounts with a fixed interest rate and an established term.

Credit and savings cooperatives: Credit and savings cooperatives offer loans with lower interest rates than banks and more flexible requirements. They also offer savings plan options for the construction of homes.

Financing process for construction in Colombia may vary depending on the financial institution and the type of construction project being carried out. It is recommended to conduct prior research and compare the different financing options to choose the one that best suits the needs and possibilities of each person or company.

The financing of construction projects in Colombia can be a complex process and requires the participation of different actors, including:

Developers: Developers are responsible for developing and managing the construction project. In many cases, they are responsible for seeking the necessary financial resources to carry out the project.

Financial institutions: Financial institutions provide the economic resources necessary to finance the construction project. In Colombia, there are different types of financial institutions that can participate in the financing of construction projects, such as banks, credit cooperatives, investment funds, among others.

Investors: Investors are individuals or companies that contribute capital to the construction project in exchange for a participation in the benefits generated by the project. Investors can be individuals or institutional.

Government: The Colombian government can also participate in the financing of construction projects through financing programs or subsidies for social housing construction projects.

It is important to keep in mind that the financing of construction projects in Colombia may also depend on the type of project and the final destination of the construction. For example, social housing construction projects may have different financing options that are not available for other types of projects.

Developers are fundamental actors in the development of construction projects in Colombia, and their role is key throughout the process, from the conception of the idea to the delivery of the project. Developers can be companies or natural persons dedicated to the management, financing and execution of construction projects.

The functions performed by developers in the development of a construction project include:

Identification of opportunities: Developers are constantly seeking business opportunities in the construction sector. These can be housing, commercial, industrial projects, among others.

Feasibility study: Once an opportunity is identified, developers conduct a feasibility study to determine if the project is feasible and profitable. This study includes the evaluation of technical, economic and financial aspects.

Obtaining financing: Developers seek the financial resources necessary to carry out the construction project. To do this, they may turn to financial institutions, investors, investment funds, among others.

Contractor selection: Developers are responsible for selecting the contractors who will be in charge of the construction of the project. To do this, they carry out a bidding process to select the company or companies that offer the best conditions.

Project management: Developers are in charge of project management. This involves coordinating and supervising the different stages of the project, from planning to its delivery.

Promoters seek the necessary financial resources to carry out the construction project. To do so, they may resort to financial entities, investors, investment funds, among others. Obtaining financing is one of the most important functions of construction project promoters in Colombia, since without the necessary economic resources, it would not be possible to carry out the project construction. To obtain the necessary financing, promoters may resort to different sources, including:

Financial entities: Promoters may request loans or credits from different financial entities such as banks, credit unions, among others. These entities evaluate the project and the promoter’s repayment capacity before granting financing.

Investors: Promoters may seek investors interested in contributing capital to the project in exchange for a share of the profits. Investors may be individuals, companies, or investment funds.

Investment funds: Promoters may resort to investment funds specialized in the construction sector to obtain financing. These funds aim to invest in profitable construction projects and may offer different financing alternatives.

Government: The Colombian government offers different financing programs and subsidies for social interest housing construction projects. Promoters may access these programs to obtain economic resources for their projects. In summary, obtaining financing is a fundamental step in the development of construction projects in Colombia and promoters must seek the most suitable sources of financing for their project, taking into account the project’s profile and the conditions of the financial market. It is important to highlight that before making any financing decision, promoters must conduct a detailed analysis of the different options and evaluate their repayment capacity to ensure the financial viability of the project.

Sindicated loans: Sindicated loans are a form of financing that allows companies or developers to obtain economic resources from different financial entities at the same time. In Colombia, sindicated loans are an increasingly used alternative by companies to finance construction projects.

The sindicated loan consists of a financial entity leading the financing process, while other financial entities participate in the project financing. The leading financial entity is responsible for coordinating the process, establishing the loan terms and conditions, and distributing the resources to the participating financial entities.

Among the advantages of sindicated loans in Colombia are:

Greater financing capacity: Sindicated loans allow companies to obtain larger amounts of financing, as they can access resources from different financial entities.

Risk diversification: By having multiple financial entities participating in the loan, the risk of the operation is diversified, reducing the risk of default.

Flexibility in loan terms and conditions: Companies can negotiate the loan terms and conditions with the different participating financial entities, resulting in more favorable conditions for the company.

Improved relationship with banks: By having multiple financial entities participating in the loan, companies can establish closer and longer-lasting relationships with banks, which can be beneficial for future financial operations.

In Colombia, sindicated loans are a financing mechanism that can be used by both natural persons and non-bank companies.

In the case of natural persons, it is less common for them to use this type of financing for construction projects since construction projects generally require large amounts of capital. However, it is possible for a natural person to lead a sindicated loan in which other individuals or companies participate.

In the case of non-bank companies, sindicated loans are an increasingly used option to finance construction projects. These companies can lead the sindicated loan and coordinate the financing process, or they can participate as lenders in the loan led by another financial entity.

It is important to note that, regardless of whether it is a natural person or a non-bank company, to lead a sindicated loan, it is necessary to have experience in project management and financial management. In addition, a careful evaluation of the payment capacity of the company or natural person leading the syndicate and the loan terms and conditions is required to ensure the financial viability of the project.”

Financing for construction projects in Colombia from abroad: It is possible to obtain financing for construction projects in Colombia from abroad. There are different options for this, including:

Foreign direct investment: This option consists of a foreign company or individual investing directly in the construction project in Colombia. This can be done by creating a company in Colombia or by purchasing shares of an existing company in the country.

International loans: Another option is to seek financing abroad through international loans. This can be done by searching for financing in international financial institutions or in investment funds that invest in construction projects.

Issuance of bonds abroad: A third option is the issuance of bonds abroad to finance the construction project. This involves the issuance of bonds in a foreign stock exchange and obtaining financing from international investors. It is important to keep in mind that each option for financing from abroad has its own advantages and disadvantages, and the choice of one or another will depend on the specific characteristics of the construction project and the conditions of the international financial market at that time. In addition, it is necessary to comply with the regulations and rules established by the Colombian government for obtaining financing from abroad.

Autor: Andres Menendez LL.M

Abogado – Derecho Financiero- (Colombia) Profesional en cumplimiento normativo y manejo de riesgos legales para entidades financieras. Graduado con Maestría en derecho financiero de La Universidad Canadiense de York University. Especialista en prevención e investigación de lavado dinero.

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