Member Article

SME Advice for Securing Funding in 2021

Funding products and conditions affecting financing either a refurbishment or new build project are constantly changing – but there are exciting new funding options, tailored to altering market conditions, launching all the time. Henry Manley Cooper, Head of Credit Analysis at SME developer funding business Avamore Capital, a pioneer of many innovative funding products tailored to the property market, explains five top tips for securing development funding in 2021, and highlights key products for renovators and developers in today’s post-Covid challenging times.

1. Cover the basics early and be upfront and honest

The key to securing funding successfully is being open, transparent and upfront. A funder is likely to work with you around difficulties if you share them at the outset, if they come up later on (and they often do), it often makes the path to completion far less smooth.

The start of the loan application process can be relatively straightforward if the correct information is provided from the outset. Funders will need to have access to the following to determine whether they are likely to be able to lend against the project:

• Full address (including postcode): Some lenders have restrictive geographic parameters and so, providing this at the outset is a quick way to tell whether a lender can proceed. A quick no is as good as a yes. • Current & gross development value: A funder needs to understand whether the proposed works are reflective of the expected value at the end of the project. Often, they will compare the proposed project to local comparables. • Loan amount & term: Another area which could lead to a ‘quick no’. Lenders often have minimum and maximum loan amounts and so, if your request falls outside of these parameters, a funder will be able to confirm straight away whether they can proceed. • Confirmation of asset class (current and proposed): Clarifying the asset class of the scheme is important, some lenders will only operate in certain areas, for example, Avamore only does residential development and so, highlighting this point early is again, useful. • General deal description: A lender will need to understand what exactly the developer plans to do with the funds to identify whether the request put forward is a reasonable proposition.

2. Share all of your information

The process of securing development finance involves a number of different service providers. At a minimum, the developer will be liaising with the lender, valuer, monitoring surveyor, solicitors and, if they choose to use one, a broker. All of the professionals involved in the deal require a huge amount of information, some of which can be repeated in multiple instances.

It is therefore critical for a developer to be extremely organised and it is advisable to set up a file sharing system to store all deal related information in one place and if necessary, provide transparency between service providers.

The provision of information is extremely important and doing this quickly means that the deal can complete in a timely manner. By not sharing what is required, completion timelines are likely to be pushed out and so, if the developer is under pressure to close the deal, being on the front foot is important. The same goes for payment of the service providers, a developer must cover the cost of the valuer, monitoring surveyor and their own solicitor, late payment of these services means that instruction will be delayed.

3. Consider everyone involved

Whilst there may be one developer leading the project, it is not uncommon to see multiple shareholders or directors involved in an SPV which a funder is lending to. When a funder conducts their Know Your Client (KYC) checks, they will need to receive the full information around everyone involved in the deal, not just the main point of contact.

The KYC process is important because it highlights whether there are any historic insolvencies relating to the people involved. Note the earlier point about being upfront on the background around the transaction. Uncovering these points at KYC stage can often make it difficult to proceed but addressing them upfront means that a funder can work to a resolution with the developer.

It is also important to know the source of where money that is being put into the deal comes from. This includes whether there are any third-party investors involved and highlighting where their money has come from. Whilst many specialist lenders are unregulated, it remains extremely important to ensure that funds surrounding the transaction are legitimate and could not implicate the borrower or the funder later on in the loan. Therefore, it is important to declare everyone involved in the deal so the funder can decide who they need more information on.

4. Think about planning

This may seem like a simplistic point but, it is an important one. All development finance deals will need to have some sort of planning in place. Even if the proposed build is under Permitted Development Rights, there are still high-level sign offs involved to approve the build. At the outset, the developer will provide the scope of works (see above) but, as the deal progresses, the funder will need to know exactly what the proposal covers.

To make this as easy and transparent as possible, we would advise supplying relevant reference numbers for the planning portal so that the lender can cross check the transaction themselves. This provides the funder with the confidence that the funds provided will be appropriate for the expected scope of works.

It is also important to check when the planning permission is set to expire. Particularly in the last year, developers may have delayed starting projects; they might then find that their proposed planning permission is due to expire and therefore will no longer be valid by the time funding is secured. Similarly, the funder will need to understand whether appropriate action has been taken to discharge pre-commencement conditions in order for works to proceed. Again, this is another area where if you are upfront with the funder, it is possible to work to a resolution if there have been delays.

5. Be realistic on costs

Costing up a development project accurately is extremely important when working with a development funder. It is key to ensure that the transaction is not underpinned by unreasonable build costs. If developer predictions are too low, it could mean that they run into cash flow issues further down the line and, if build costs are too high it could indicate that the developer will not get sufficient profit out of the project and so should review their cost schedule.

As an average, the following are reasonable build costs for the type of scheme: • £125 per sq.ft for new builds • £100 per sq.ft for heavy refurbishments • If the project is part complete, cost per sq. ft is reflective of the level of works required. If it is at the earlier stage of the build, costs are likely to be align with the above

Having a realistic cash flow schedule is important so that the project does not experience delays later on in the process.

This was posted in Bdaily's Members' News section by Kirsty Hunt .