Refurbishment and construction snags are something most property professionals have to deal with. Third parties are prone to letting people down, or a delay in releasing funds from elsewhere could place your immediate plans for your project at risk.
Below are a few of the typical scenarios in which you will need to secure property development finance:
In many cases, buying a property can depend on releasing capital from a property that you have just sold. When a purchase must proceed before your linked sale has been finalized, temporary finance can be an option to bridge this gap.
- To Fund Renovation Or Construction Costs
An institutional lender may decide that a property has to match a certain spec level before they will agree on long-term finance. You may need temporary funding to complete the work to match up to these conditions.
- Liabilities And Unforeseen Costs
When more than one snag comes up, the budget that you had previously allocated may not be enough to complete your project. You might need a cash injection that you will repay once the property is sold, or once the property starts generating a rental income.
If you would like to find out more. Refer to our comprehensive Property Finance Guide to help you kickstart your projects.
When these forms of cash problems occur, the faster you are able to resolve the issue, the more you increase your chances of avoiding further complications or delays. Below are some of the options that you may need to consider:
- Borrow The Funds From Your Personal Savings
This is a traditional "raiding the piggy bank" scenario that involves transferring your personal funds to match up to the urgent requirements of a property business.
If you do have the cash available, this might appear to be the most obvious and easiest method to solve your short-term problem. It also stops you from having to pursue an external source of funding.
However, keep in mind if you are trading your business under a company structure that is limited, these processes are not as simple or easy as transferring your funds from one of your accounts to another. To make sure this transfer is treated in the correct manner for tax reasons, the transaction will need to be formalized (for example, a director's loan).
You also need to know that if you "borrow" funds from one of your tax-efficient investment vehicles such as an ISA or pension might mean that you will lose out on tax advantages that you have already built up. Even when you have the funds to transfer from a personal bank account, this is not necessarily the most cost-effective or best option.
- Business Loans
In addition to personal funds, property professionals often turn to a bank when they require finance. With this in mind, over 50% of the smaller firms state that not being able to source funds is usually the most consequential challenge that their businesses face. It proves that the traditional funding sources, especially the banks, are slow when it comes to matching up to the immediate needs of these businesses.
If you already have a reliable relationship with a bank, and they already know about your particular business model, then this often increases your chance of a swift and seamless loan approval. However, if this is the first time you are applying for finance, most banks will typically conduct due diligence and thorough eligibility checks. Even when you are approved, you need to know that the drawn-out and long nature of these approval processes might make it hard for you to rely on your bank when you require immediate short-term finance.
- Using Your Business Overdraft Facility Or Credit Card
This option may be viable when the amount required is small (for example, within the maximum limit of either your overdraft or credit card). If you use this option, you need to make sure you can repay this debt as fast as possible, otherwise, the high-interest rate could mean that you land up paying back far more than some of the other alternative methods.
- Second Charge Mortgages
If you have a property mortgage already, you could access finance by extending an amount that you need under this loan (for example, first-charge remortgaging). The issue with this option is that this is not always the most practical method for most borrowers. For example, things may have changed a lot since you first applied for finance, which could mean it is difficult for you to pass the affordability test with your lender. Or rearranging your current loan could result in an interest rate that is much higher on your entire loan. Or you may be faced with early and large repayment charges.
In these situations, it would be better to take out a "second charge mortgage". This is essentially another loan taken from another lender that will be added to your existing mortgage. This option can be very valuable and useful for the buy-to-let landlords. For example, you might need to take out a second-charge loan so that some of the equity can be released from your current investment rental property and then used for funding a renovation or purchase of the next property.
- Refurbishment And Development Finance
Banks often don't understand the requirements that property professionals have, so getting them to agree on funding can often turn into a drawn-out and frustrating process.
Development finance often provides a more welcoming or accomodating alternative. It is also often suitable for refurbishments, conversions, or new builds. If you have to change the existing terms of an agreement in order to meet short-term requirements, then a personalized and tailored approach will mean that (depending on your situation) your requirements will usually be met when compared to the inflexible approaches that the banks take.
- Bridging Loans
Devised originally to offer buyers stop-gap finance in order to fund their purchases, bridging loans or bridging finance is a type of interest-only, short-term lending option that can also be used for many other situations.
For example, you might need an injection of cash to match an unexpected requirement to buy extra equipment or when you need extra labor, or for funding a deposit at an auction until you can sort out permanent finance. With "open-bridge" borrowing arrangements, you must be aware that there will be a "cut-off point" (a date that you will have to pay back the loan). This is usually within a year, but more importantly, there will be no penalties if you decide to repay the loan sooner. And with very low minimum borrowing amounts without a set maximum, this option is very flexible and can be personalized to your needs and requirements.