Securing finance is a vital part of any property development business. Mark Holden from Go Develop outlines three key areas to carefully consider when selecting a funder.
We’re in such uncertain times that the need for a secure funder with solid foundations and one that knows the industry and all its challenges, is key.
One strong piece of advice for SME housebuilders would be to realise that choosing a funding partner for the long term has never been more important than during a time of great financial and political dysfunction.
It amazes me how often so little due diligence is undertaken by borrowers into the finance companies they are considering working with. Too often there is selective amnesia in remembering how funders behaved towards housebuilders during the last financial crisis and we know what comes around goes around, in life.
Potential borrowers are fortunate in the fact that the lending marketplace is now more diverse and dynamic than it ever has been before. However, that very diversity can bring with it risks and issues.
Do your research
In situations where you might be seeking flexible borrowing in support of a construction project, it’s highly advisable to do your research thoroughly in advance. That should not be simply a question of looking at a variety of P2P funding platforms but considering alternative options, such as joint venture funding of the type that we offer at Go Develop, where 100% of the land, build, stamp duty and project costs are covered.
In addition, consider the financial stability of the funder. Borrowers should be seeking a professional, business-as-usual and trauma-free engagement with the provider of their funds. It’s therefore important to be certain that the funds provider is ‘running a tight ship’. Ask to see their balance sheet, take a look at their past record, speak to their previous clients, read through the case studies.
One huge advantage in opting for joint venture funding is that the project goes beyond the transactional and becomes a partnership with a shared purpose – and therefore a shared achievement.
SME housebuilders often struggle to prove their track record and have their cash spread over multiple sites. This can cause them to be over stretched and when delays or events occur outside of their control, they run out of cash and into trouble. Typically, lenders will stick rigidly to the fine print, so make sure you’ve studied this in advance.
At Go Develop we prefer to help our housebuilder partners through a blip, not pull the rug from under them. The nature of joint venture funding allows us the freedom to put our full support behind making the project a success, and as we approach a more challenging environment our model offers stability, expertise and flexibility
Finally, before taking up any line of funding, a borrower must understand exactly what is required from themselves. So many SME housebuilders have regular ‘funding gaps’ with short term cashflow problems while trying to expand their sites, or are just a few percentage points or pounds short of what their banks and alternative funders demand they put into a project.
Regrettably, SME housebuilders still lose valuable sites they work on through options expiring or by being outbid by the larger housebuilders, often when they just have temporary cash shortages. Ensure you’ve got your own house in order, you know your own timelines and find a partner who can work with you rather than trying to fit into their ‘tick box’ criteria.
With thanks to joint venture funding and finance group Go Develop for preparing this article.