Alternative funding for refurbishment opportunities

For property investors, refurbishment is often a relatively quick way to add value. Whether it’s breathing new life into a tired building or completely overhauling a structure to increase its value, refurbishment projects have long been a favoured strategy for generating significant returns.  Traditionally, bridging finance has been the go-to solution for providing funding for refurbishment projects, offering short-term loans that help investors cover the cost of renovations until a longer-term financing solution is in place or the property is sold.

When we talk about refurbishment finance, it’s important to distinguish between light and heavy refurbishment loans, as each caters to different project scopes and investor needs. Light refurbishment loans are typically used for projects involving minimal work. These are usually non-structural modifications, such as cosmetic enhancements like repainting, replacing doors and windows, or updating bathroom and kitchen fixtures. Projects under this category generally do not require planning permission and are considered less risky by lenders.

Consequently, light refurbishment loans are often easier to secure and are ideal for developers or investors looking to make quick, superficial improvements to a property. The goal here is usually to either sell the property at a profit or enhance its rental potential, often leading to a quick turnaround and repayment of the loan.

Heavy Refurbishment Loans

On the other hand, heavy refurbishment loans cater to more intensive projects that often involve structural changes. These might include extensions, loft conversions, or significant remodelling that may require planning permission. Due to the larger scope of work and the potential for complications, heavy refurbishment loans are generally considered higher risk. This risk is reflected in the lending criteria and rates offered by lenders. However, for those willing to take on the challenge, heavy refurbishment projects can transform dilapidated properties into high-value real estate, such as a higher-end HMO, offering potentially substantial rewards.

Alternative Overdraft – Revolving Credit Facility

While bridging finance has been a reliable option for funding refurbishment projects, it’s not the only solution available to investors. An increasingly popular alternative is a revolving credit facility, such as the Alternative Overdraft offered by Alternative Bridging Corporation.

Such a facility can present a versatile and cost-efficient way to finance heavy refurbishment projects. Unlike traditional loans, which often require full repayment within a short timeframe, the Alternative Overdraft offers a drawdown facility that allows investors to access funds as needed throughout the project’s life. This flexibility means that interest is only payable on the outstanding balance, making it a more economical option compared to a standard bridging loan, where interest is usually charged on the full loan amount from day one.

Advantages for refurbishment projects

The key advantage of a revolving credit facility like the Alternative Overdraft, lies in its ability to leverage under-utilised assets, allowing them to play a prominent role in an investor’s finance arrangements. For example, investors can secure the facility on existing assets, enabling them to rapidly draw down funds to pay for raw materials at the start of a refurbishment project.

The drawdown facility is particularly beneficial for ‘heavy’ refurbishment projects where costs are incurred incrementally, such as paying contractors or purchasing materials. This staged approach not only helps manage cash flow more effectively but also ensures that funds are available exactly when they are needed, reducing the financial strain on the investor.

Providing liquidity whenever a borrower needs it

As revolving credit facilities are typically designed to provide liquidity whenever a borrower needs it, they offer the perfect overdraft solution for other real estate-related activities beyond refurb, including property auctions, site acquisitions, and work-in-progress financing. One of the standout features of this facility is its flexibility; it can be drawn upon and repaid multiple times, with no need for repeated application processes. This is particularly advantageous for developers who need to move quickly when opportunities arise, as they can secure the necessary funds without the delays associated with traditional loan applications.

Available for up to two years and subject to review, the Alternative Overdraft can be secured by a first charge over commercial or residential properties, or a second charge over residential properties. Loans are available from £250,000 to £3 million and the interest on the outstanding balance can be serviced or accrued, giving investors further flexibility in managing their finances.

While traditional bridging finance remains a popular option for refurbishment projects, a revolving credit facility offers a flexible and cost-efficient alternative. Its drawdown facility, interest structure, and ability to be secured against various property types make it an attractive option for investors looking to finance both light and heavy refurbishment projects. For brokers, understanding and recommending this facility could provide clients with a powerful tool to optimise their investment strategies and achieve their refurbishment goals more effectively.