It might surprise some developers to learn that high street banks and building societies still provide the highest level of funding to the Small to Medium Enterprise or SME sector. But there are new players in the market in the form of new types of banks, challengers to the big names and these new institutions have been given the moniker of ‘challenger banks’.
Challenger banks, the new names for funding
Challenger banks are markers in the financial marketplace set up to compete with the long-established big names, they are authorised organisations and covered by the Financial Services Compensation Scheme (FSCS). There are some challenger banks focused on commercial lending and these include Aldemore, Shawbrook Bank and One Savings Bank. Digital challenger banks include Atom Bank, Starling Bank and Monzo. Challenger banks can offer fresh opportunities to commercial developers but their charges might be higher.
What are the other alternatives for funding to the high street banks and challenger banks?
• Non-bank lenders – there are quite a few non-bank lenders who can provide debt finance
• Private equity – usually accessed by brokers or financial intermediaries and this capital is usually added to that already in the business
• Finance Brokers – the National Association of Finance Brokers has a network of members who can help you identify potential funds for your development project
• Comparison websites – much as you would expect to see with other sectors like car insurance, there are sites which provide a collection of funding opportunities for people to view
• Crowdfunding – potentially a very lucrative if a somewhat random way to raise funds, there is the chance to connect with thousands of investors who may be interested in an element of the construction project for sustainable or ethical reasons. A connection is usually set up through specific internet platforms
• Housing Growth Partnership – backed by Lloyds Banking Group and Homes England, this is a social impact investor and partners up with small housebuilders with a proven track record and developers in a certain category which are those building anywhere from 5 up to 175 units per year and who want to grow their business
• Housing Delivery Fund – this funs is backed by Barclays also in conjunction with Homes England, loans of between £5m and £100m are available to borrowers with a solid track record
In the UK, Brickflow.com is the UK's first development finance search engine, this can cover all bases and really open up a variety to property developers who have been previously restricted to high street banks. (you should definitely check these guys out)
Government support schemes
The UK government is very keen to support housing development; there was already a backlog before the Covid-19 pandemic and lockdown and the Government will be very keen to ensure that the housing market is well supported in order to re-start the economy and stave off recession as much as possible.
There is a scheme called the Home Building Fund Homes England which has already been referred to as a possible funding route and this is money administered on behalf of the government. Funds are accessible to private sector developers who are building new homes for sale or rent. There is plenty of online information about the eligibility criteria at https://www.gov.uk/government/publications/home-building-fund
Here are some key facts:-
• Development loan finance is currently available to draw down up to March 2023
• The fund functions in a similar to traditional lending routes and so will undertake due diligence as part of the application process
• Applications are subject to status so applicants have to meet all of the core criteria to be eligible for funding, for instance, they should demonstrate that the project would not progress as quickly or at all without the support of the Fund
• The development project must be in England
• The minimum number of houses being built is five new homes
• The project must demonstrate good value for the taxpayer
• The project must be ready to proceed or almost ready so planning permission should be in place, the land must be under the control of the applicant and there should be demonstrable evidence of how the loan will be repaid
• The fund will never pay 100% of the total development costs
• Once secured, loans are drawn down in tranches
There is an online enquiry form which can give applicants an early steer about the viability of their application. Like many other development loan application processes from commercial organisations, the fund will require evidence of applicant experience, business plans and finances.
What kind of things do lenders want to see on an application for commercial finance?
There are various elements that lenders will warm to on an application for funding and this could make the difference between the success of your project or failure. These points are common to most financial institutions and funding schemes so, if you are a new developer or are established but taking on a more ambitious project for the first time, it always pays to do your homework.
• Research – any lender is going to want to see thorough research into the type of site and the properties being built upon it. Your choice of site should be supported by hard evidence of its suitability and the viability of the houses which will form the finished product
• Planning permission – it is always better if possible to have the planning permission secured before approaching a lender. Some will approve finance subject to planning permission but this can look less attractive if you are a new developer or are branching out into bigger territory. By the same token, planning permission can be a long and complex process depending on the development and if you also spend a lot of time on the funding application then this could all be a waste of your time and resources if planning permission is not granted
• Demonstrate experience – a solid track record will make your application appealing to any lender. A development team with demonstrable prior experience and a successful track record will certainly go in your favour. If you are a first-timer then expect to work harder to show that the project is viable and produce a watertight proposal. Your application for funding may need to be more conservative i.e you put more capital into the project, to reflect and compensate for any lack of experience
• Competitive quotes – whoever is doing the work for you should be priced competitively offering value for money and you should be able to demonstrate that you have tight budgetary control; it is not unusual for costs to spiral upwards with any project so your application should also include a layer for contingencies and unforeseen problems, delays and unexpected developments, a good figure to set is between 10% and 15%
• Own the site outright – your application will be more appealing if you own the land, this is one of the most significant factors for a lender when assessing the project. If you are the site owner and free of mortgage or other forms of loan then you can sometimes receive funding of 100% of the development costs
• Complete the application carefully and thoughtfully – sloppy applications with gaps or omissions give a very poor impression and reflect badly on your level of commitment to the project. Take the time to complete all the paperwork very thoroughly and in as much detail as is required
• Choose an appropriate funding vehicle – there are many different ways to finance development and it is important that the product you are applying for fits the bill as far as the lender is concerned. One popular method is to use short-term finance for capital purchase and build costs and then switch to a longer-term commercial mortgage or loan whilst the properties are being sold
• Research your lender – all lenders have different portfolios of loans and their appetite will differ according to the location of a project and the type and size of the development. It is important to approach a lender who will welcome your application because it is appropriate for their book of business
• Hire a project manager – unless you are an experienced developer then a project manager could be a real lifesaver and will probably end up saving you money over the long term even though they are an initial cost. An experienced project manager will be able to bring years of expertise to your build which can prove invaluable if you are a new developer. If you are a busy developer with more than one site on the go then a project manager might be a necessity to keep on top of everything and keep it all on track
• Be realistic and honest – don’t fabricate or ‘big up’ your experience, skill, track record or financial standing; an experienced commercial lender will not be fooled by impressive claims, they only want to deal in hard evidence and if you are found out then you will have no credibility with the lender and that could well be the end of your application
Property development is exciting and challenging so it pays to choose a financial partner who shares your vision and is interested in creating a proper partnership until the project is complete.