Helping developers deal with cashflow challenges

Short-term lenders have long been the go-to finance partners for SME property developers. Initially offering ‘standard’ bridging loans, over recent years providers have tailored their short-term loan propositions into development finance products to help developers cashflow.

Created specifically for property developments, such loans help fund projects ranging from significant structural alterations and major extensions to the establishment of completely new properties on freshly acquired land.

Development Finance

Development finance has been a very successful offshoot of bridging finance and the majority of bridging loan providers now offer it in some form of other. As with bridging loans, the application process for development finance is relatively quick, so long as the broker ensures that all of the relevant information and paperwork is provided to the lender in a timely fashion.

That said, there are times when developers’ circumstances require something a little different, especially when it comes to managing cashflow. For example, property developers will typically be buying materials from various sources as well as dealing with a number of different contractors at any one time. They may also need money to kick off a new project before they’ve cashed out on an existing development.

Revolving credit Facility

This is where a revolving credit facility can be invaluable. It provides the client with access to funds without having to go through an application process every time they want to use the finance. Unlike term loans that provide a lump sum of money upfront, a revolving credit facility allows developers to draw funds as needed, repay, and draw again.

The benefits of such a facility to developers are varied. For instance, developers often struggle to secure the materials they need for their projects quickly, resulting in them facing higher prices, especially in the recent inflationary environment. Instead, revolving credit facilities can help developers access capital at the start of their project, keeping a lid on costs and maximising a project’s profitability.

Business expansion opportunities

Temporary cash flow issues can also be mitigated by a line of revolving credit. For example, a developer can use the facility to cover expenses even if its receivables haven’t yet been collected. Alternatively, the facility can help with business expansion opportunities without having to renegotiate a new loan or seek additional financing. It can also help the borrower move extremely quickly to take advantage of an opportunity which won’t be around for long; certainly not long enough to complete a traditional loan application process.

The facility can be drawn and repaid many times, making it an ideal overdraft for real estate purchase, property auctions, site acquisitions, or work-in-progress funding.

It’s also important note that in a revolving credit facility, interest is charged only on the amount drawn rather than on the entire credit limit. This means that a developer will not be paying for the privilege of having the whole facility, rather just on the funds they’ve drawn on.

The development finance loan is key for SME developers who require funding for their projects. However, they may also need to act quickly and decisively, and the revolving credit facility can provide such immediate access to liquidity whenever required, which is why it should also be part of every developer’s armoury.

Jonathan Rubins, director, Alternative Bridging Corporation