It is no secret that mainstream bank lending to SMEs and property developers remains in the doldrums.  Indeed, as the graph below shows, over the last two years, although the trend is upwards, the figures are fairly static.

 

 

According to a recent report by Funding Options, bank lending to property developers has halved over the last two years.

 

 Current government policy is designed to reduce house prices, but the only real way to increase the supply of affordable housing is to build more houses.   For this to happen, it is necessary to encourage not only the big building firms, but also the small developer, especially for smaller-scale projects such as urban fill-in sites.

A small developer may be able to find a suitable site, but without initial funding he or she cannot purchase it.   Mainstream lending is primarily geared to the long term, with lenders preferring to fund completed projects.

Bridging finance is the answer – many bridging lenders will fund purchases of property with planning permission. Some will even fund property where an application for alteration of planning permission is in progress.   Permitted development funding is also available.   The prudent use of this funding will enable a developer to purchase a property, get his/her most advantageous planning permission and get construction ducks in a row.   Once everything is sorted, development finance or long-term finance can be obtained. Some bridging lenders also offer this facility.

Clearly, borrowers must plan finances carefully and not jump into development without proper thought. Provision must be made for the inevitable delays incurred in construction and the loan term must provide for this. Borrowers should also be aware that completion of loan arrangements with mainstream lenders is a complex and time-consuming business and delays should be expected.

The same applies to small businesses (defined by the Bank of England as having an annual turnover of less than £25 million). These businesses need to be able to act quickly when opportunities arise. Where they hold property assets, a bridging lender can provide funding at short notice. Not only that, but when cash flow improves, repayment can be made without penalty.

This flexibility is attractive to borrowers. Yes, bridging finance is more expensive than some traditional funding methods, but it can enable a developer or a business to take advantage of opportunities which they would otherwise not be able to take advantage of – an increasing challenge as the mainstream banks continue to decrease their lending to developers and other small businesses.

Of course any developer needs to be aware of the government moves aimed at restricting the amount of buy-to-let lending if the exit route of their bridging loan is to either rent out a property or to sell it to a landlord. Developers will also now be hit by the additional 3% stamp duty on any property that they buy, but as long as the feasibility of the project has been properly assessed, access to finance is there in the form of short term bridging loans.

Benson Hersch, CEO of the ASTL

 

A version of this article was published by Business Moneyfacts in April 2016