Who Lends To Small and Medium Sized Developers?

It’s been 10 years since the Credit Crisis hit the U.K. and World economy. For those of us in the finance industry, the property business and construction it was a very difficult time.

Lenders were pulling products on a daily basis, with some shutting their doors completely. We were all seeing situations where you’d close the office door on Friday with a loan arranged for a client, to receive an email on Monday morning to say the deal was off.

Ordinarily you’d think that’s not great but we can cope. Back then it was much worse as there wasn’t always an option to fall back on.

Thankfully, times have changed. Since then the short term market has grown enormously.

Bridging finance used to be looked at as being a last resort option for those stuck in a chain or looking to keep a chain together to allow the next purchase to take place.

That perception has changed, many developers and investors just see it as a quick and easy way to buy property to either sell on or develop in some way.

Development finance has also seen a huge increase in the number of options available to property professionals.

A common conversation I have with clients is along the lines of it being difficult to raise money to do their own projects. I’ve heard this from new starters and those with years of experience.

This isn’t the case, or rather, it doesn’t have to be.

Of course, some projects are much more difficult to fund than others due to their circumstances. And, there will always be those that no one wants to lend into – if you have one of those and have spoken to 100 companies, it’s probably time to look at something else!

Let’s have a look at who is currently lending in the UK property development market:

1. Banks.
2. Challenger Banks.
3. Peer to Peer Lenders.
4. Specialist Lenders.
5. High Net Worth Investors.

1. Banks.

The obvious starting point for most when thinking about borrowing money is the bank. They are familiar names, have high street branches (for now) and have the cheapest money.

The myth that there is no money available probably comes from clients dealing with banks; They are notoriously hard to get finance from. Not only are there multiple hoops to jump through to get to the money they are incredibly slow.

It’s no exaggeration to say that we have had clients that could have built and finished a project waiting for their bank to say “no”.

At the moment most of the banks are closed to development, it’s not what they want to get involved in, so for the majority of borrowers they are a waste of time.

By all means, if you have an existing relationship with your bank, a track record of projects completed with the, they could be worth talking to.

Clients of all sizes and experience can find it hard to move away from the high street and will cling on just in case they get a “yes” this time.

The process will be long and decisions one way or another slow. You will be asked for a lot of information about you and your project, you will need a clean credit rating and experience.

Cheap money comes at a cost – time.

That said, if you can satisfy the criteria and you can get the bank to fund you, well done, you probably have the cheapest finance available.

2. Challenger Banks.

You might have heard this term before but didn’t know what it meant. Basically, these are lenders set up to compete with the traditional banks. They are competing on the basis that they provide a better range of products coupled with a better service.

Let’s face it, you don’t often hear about businesses saying what a great job their major bank is doing, so the “challengers” are starting to take chunks out of the market.

They are mostly online companies, so you won’t find their branches in town but as the world heads to doing all their business on the internet this shouldn’t be too much of an issue.

For specialist lending, such as development finance, you will be dealing with a person who will become your “bank manager” who will be happy to meet you, in fact most will insist on it.

That these companies are smaller and less well known mustn’t be a reason you won’t consider them. They have to comply with the same rules and regulations and you won’t find them being fined left right and centre, like the big boys.

Their rates and terms will be very competitive, even compared to the high street. They will probably be more expensive on interest rates, but then it’s not all down to rate. You need to be considering the whole cost of a loan as well as taking into account how you will be dealt with.

This sector of the market is growing, the trade press has carried stories about several lenders getting full bank status.

This is still cheap money, so you will still have plenty to do to get it. The criteria will be less regimented but the lender will still be looking for a good track record and you will need a good Asset and Liability statement to cover Personal Guarantee’s.

3. Peer to Peer Lenders.

These are very much the new kids on the block. Crowd Funding, as it is also known, has gained popularity over the last few years with lenders seemingly popping up every week.

For most of them their core loans are for trading businesses. They will provide an amount, unsecured (normally), that is to be paid back over an agreed period. It can be a fairly cheap and easy way to get backing for your business when banks say “no”, again.

The main issue here is that development funding is very different to a lump sum loan. As you no doubt know, a development loan is provided in stages as work progresses. To monitor that requires experience, time and resources.

One of the larger P2P lenders pulled out of funding construction in quarter 2 of 2017 and there are plenty in the industry that don’t expect them to be the only ones.

For the borrower there are some plus points. Quite often there are small or no exit fees and the rates can be close to those of the challenger banks.

One question you need to ask yourself, about the company you are dealing with is – are they experienced?

You will know that projects all hit snags, there are issues that crop up that have to be dealt with. When this happens you want a lender that can cope and that can work with you.

If you go down the path of applying with a a peer to peer lender it is imperative that you ask lots of questions about how they work.

Such as, how do they get their funding? Not all work in the same way.
Do you need to go back to the market every draw down? How long might that take?
What happens if you need to extend your time?

Ask everything and anything you can think of and see how you feel about the responses you are given.

You must remember that you will need to work with the lender all through the project. Every time you need to draw down money you will be relying on them to perform to make sure you get the money you need when you need it.

Crowd funding is all about members of the public investing into projects and businesses to make a return on their money. With that in mind the lenders can be strict on criteria.

4. Specialist Lenders.

There are various lenders that are not household names nor are they banks. They are, at the most basic, lenders looking to fund projects.

The market for funding development has grown enormously in the last 2 years or so. Many started in bridging finance which grew exponentially after the credit crunch and moved over to development as there was less competition.

There are others that have always funded developers so they are long on experience, which can be invaluable to you during the life of the project.

Rates tend to seem expensive at first, it’s not uncommon to pay rates of well over 1% per month, with some lending at 1.5% per month or more.

The rates are higher for various reasons.

Firstly, the cost of the money to these lenders is not cheap. Just because base rate is very low, at the time of writing, does not translate to cheap borrowing for these lenders. They are funded in various ways – hedge funds, high net worth individuals, bank loans or personal capital.

The return that investors want can be in the double figures, so these lenders are just charging a margin, which is normally smaller than you might think.

The criteria is often, though not always, much easier to qualify for for. First time developers will be able to be funded by some of these lenders, for example, which banks would not be interested to back.

These are not generally enormous companies, some might only be one or two people, so you can build a good rapport and relationship with them, making the process much easier and smoother.

Pound amounts can range from a few thousand up to tens of millions. There are options for most sensible projects and as the market is very competitive there are attractive terms to be had.

It has to be kept in mind that you aren’t dealing with high street institutions lending on existing property. This type of lending does have risks, so you can’t compare your home mortgage to this type of lending. It’s not the same so is never going to have the same cost.

5. High Net Worth Investors.

If you can find them you could borrow from someone that is a high net worth individual, willing to invest in your project.

They lend you the money to carry out the building work for either a share of the profit or for an agreed interest rate, just like a normal lender.

Quite often a profit share is the way this sort of lender gets their cut, so it can be a very expensive way of borrowing.

The main benefit is that their criteria will likely by much less strict and as long they have the confidence in you and the project, funding will be available.

It may be that rather than a single individual you can get money from a pool of investors, friends and family putting in various amounts to make up the capital you need.

Obviously, mixing friends, family and money can be very toxic so you need to be going in with your eyes open.

In principle it sounds very straight forward, you get a pot of money to carry out a project and give it back when you sell or refinance away.

What happens if one of your investors decides they can’t commit the amount they thought, or need the money back part way through, before you can give it to them. Things could get very messy – beware!

Conclusion

The market, again, at the time of writing, is full of money. ( There’s an argument (from the lender side) that there are too many lenders around, providing that money, which is not sustainable but that’s a different discussion.) Lenders, of course, make money from lending money – they have to get it out of the door to stay in business. With that in mind, the providers of construction loans, no matter the scale of the project, are looking for reasons to say “Yes”.

As long as your project is sensible and really is a quality proposition you will have a very good chance of being funded, it’s just a case of by whom and at what cost.

It is worth noting that before going to any lender, or broker, you need to be very clear about your figures and make sure they are realistic. Lenders will make their own mind up on end values (GDV’s) of a project, so there is no point in you artificially inflating it. Even if a lender missed it, the valuer won’t, so it will cost you hard money to not get funded.

There are options out there for brand new developers and for experienced operators, there are those willing to push loan to values to attract business and competition has driven down cost – now is a great time to be developing property!