When it comes to property development finance, bigger does not mean better, argues ASC Finance for Business.
We at ASC Finance for Business recently had a builder approach us looking for finance. Now that’s nothing unusual – we’ve done plenty of property development finance for various clients over the years. This client had strong experience doing renovations and developments for others, but was looking to head up a project of their own. They were looking at buying a local property, refurbishing and extending it, then selling it on for a tidy profit. So far, so good – we’ve seen many projects like this before. But the client had a worry – they thought that because they were a small operation, it was going to be near impossible to get finance. In reality, there’s no truth to that at all.
It’s unfortunate to see this myth become prevalent, so we’re here to put it to bed. We want to answer the question of what you need when you’re looking for property development finance – size is certainly no object. So, what are lenders looking at when it comes to development finance?
1. The team
When you’re applying for development finance, one of the biggest factors which lenders consider is experience. The primary thing a lender will look at when making decisions is you, your team’s and your company’s track record. This is especially true for smaller teams – with fewer people “in the picture”, you need to make sure you have experience on your side.
Of course, if a lender is looking at your company, this does raise a question – what about SPVs? A SPV is newly created, so it’s got no track record at all to back it up. You might be worried that would mean a SPV could never find finance. No need to be concerned – the lack of a track-record isn’t a deal breaker. Lenders will always look at the individuals behind the development, not just the company.
2. The security
The amount of finance you’ll get through a loan is intrinsically linked to the property you’re building on. Lenders want security – for property development, that security is almost always the property or land being developed. The finance you can raise is based on a percentage of the value – referred to as the loan-to-value percentage (LTV). In property development, LTV normally initially caps out at around 75 per cent. However, if you’re only looking to finance development costs, and don’t have to purchase the land, then it’s sometimes possible to borrow 100 per cent of costs.
However, it is possible to borrow more than this. As you work on the property progresses, the value is going to continue to increase. Likewise, the cost to completion will decrease. Therefore, lenders will consider further advances of finance against the Gross Development Value (GDV) of the property.
3. The numbers
Any property development ultimately has one aim – profit. You are looking to make money off of property you’re developing, and you’re looking for finance to try and ensure that. A lender knows this – and let’s be honest here, they’re out to make some money from this venture too.
Before a lender puts funds behind a venture, they need to be certain that at the end there’s profit. When it comes down to it, lenders are going to want to see the underlying numbers and facts behind your project. Planning permission, cost per square foot, product cost, total cost, potential resale or refinance value. You’ll have to be prepared to demonstrate a plan for success to convince lenders of the profitability of your development.
It might be tempting to think that because bigger projects will generate more profit by the numbers, they’ll be what lenders prioritise. However, size has absolutely no bearing on your chances of finding finance. A big project and a small one will have different interactions with lenders – that’s only natural, they’ll have different requirements. But in no way do lenders view smaller projects as “lesser” prospects.
These are just three of the bigger things to keep an eye out for when putting an application in. There are plenty of options that could come into the mix. But the thing to keep in mind throughout the process is that size doesn’t matter – business finance is bespoke. A big company and a small one aren’t “competing” for finance – lenders are happy to find the solution that works for you, no matter your size.
No matter what you’re looking for, though, we’d always recommend engaging professional help with your finance search. The importance of someone who understands your project, and who you trust to deliver the results you need, can never be overstated!