For the vast majority of developers and construction companies, financing projects via external funding sources is the norm. It is comparatively rare for developers to pump huge sums of their own capital into their projects, with most preferring to keep their cash flow as liquid as possible.
From commercial construction loans to specialist development finance to bridging loans and so on, there are countless options available for the UK’s property development sector. Each of these loan types has its own pros and cons, along with a long list of potential applications.
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But what remains the same in all instances is the surprising flexibility of these facilities and similar funding solutions. Contrary to popular belief, it is firmly within the hands of the borrower to ensure the loans they receive are both competitive and cost-effective.
Much of what takes place during the application process will heavily influence the APR and overall borrowing costs you can expect to be quoted. The more strategic your approach to your application, the most likely you are to be offered an affordable deal.
With this in mind, here are four ways construction companies and property developers can maximise cost-effectiveness when seeking external funding:
1. Borrow Only What You Need
Firstly, the temptation is often to borrow as much as you can, just as long as you can afford the repayments. Unfortunately, borrowing more than you absolutely need paves the way for added costs. All construction loans and property development loans constitute forms of debt, irrespective of how competitive the borrowing costs may be. They are still costs, and overall costs will always be higher when borrowing more.
The less you can get away with borrowing at any one time, the better. Always remember that the lower the LTV of the loan, the easier it becomes to qualify for a superior interest rate. And where early repayment is an option with no fees or penalties, use it if you can.
2. Consider Eco Incentives
Increasingly, the government is making efforts to incentivise construction companies and developers who commit themselves to sustainable builds. Various grants, bursaries and general financial incentives have been introduced to motivate investments in ‘greener’ properties and energy-efficient initiatives. Something that most market-watchers see continuing indefinitely, as the UK’s energy crisis deepens.
Green mortgages and similar products are becoming more widely available, with preferential rates and generous discounts up for grabs for those who demonstrate their commitment to eco-friendliness.
3. Consult with a Broker
Consulting with a broker before seeking funding can boost affordability in two ways. Firstly, it provides the opportunity to discuss the various funding options available in a frank, open and completely objective capacity. You gain access to invaluable information from an experienced professional, with no brand bias or pushy sales pitch involved.
Along with helping you choose the right product to suit your requirements, your broker will also negotiate on your behalf to ensure you get an unbeatable deal. It is worth remembering that many specialist lenders offer their services exclusively via broker introductions – not directly to customers.
4. Formalise Your Exit Strategy
Lastly, evidence of a workable exit strategy is almost always mandatory, when applying for construction loans or property development finance. However, it is the strength and viability of your exit strategy that will determine the ‘risk level’ of the loan, in the eyes of the issuers. Consequently, the more convincing your exit strategy is, the more likely you are to be offered a competitive deal.
This is something that should therefore be prioritised when preparing and submitting your application. Provide as much evidence as you can to convince the lender your exit strategy is legit, and show that you have prepared adequately in advance for all possible outcomes.
For more information on any of the above or to discuss property development finance in more detail, contact a member of the team at UK Property Finance today.
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