First-time developers face numerous challenges, the most significant of which is obtaining the funds you require and convincing lenders that you are a trustworthy developer despite your lack of experience.
This is the catch-22 situation first-time developers face. How can you gain experience as a developer and demonstrate trustworthiness if you’ve been refused the necessary funding by lenders and can’t make your start?
We’ll review how first-time developers can increase their chances of obtaining development finance, but first let’s look at some of the obstacles.
Why do so many lenders refuse to lend to first-time developers?
Even if they don’t have a long track record of success, a developer who can get in on the ground floor of a successful project will be able to make a large profit. Many lenders, on the other hand, are wary of lending to borrowers who are just getting started in the field.
The issue with lenders is always one of risk.
Lenders dislike taking risks, especially the danger of not being paid back when combined with the risks that come with development projects. Any project they are asked to fund with property development funding will be scrutinised closely, and an expert in the field will be brought in to analyse the plan, the property, and the developer.
A developer who has completed years of successful projects poses less risk to lenders than someone who is embarking on their first project without a track record of completing projects.
When it comes to development financing, lenders frequently look for developers with prior experience because:
- They are aware of their previous performance.
- Developers with more experience are more likely to have made mistakes and learned from them.
- In comparison to inexperienced developers, professional developers pose a lower financial risk.
- Because of this bias, it might be difficult for first-time developers with no prior development experience to obtain development financing.
Additionally, an unprecedented couple of years finds us still recovering from the impact of the COVID-19 pandemic and Brexit. Each has contributed to labour shortages and material issues due to global supply issues, and we now find ourselves on the cusp of a possible deep recession in the UK.
So with these issues impacting the likelihood of lenders providing funds, what can be done?
Development Financing – A Solution For First-Time Developers
Whilst traditional lenders are less likely to provide funding, development finance from a specialist can be used to fund construction and development costs, as well as to cover the cost of land purchases.
Development finance is a short-term financial instrument offered to property investors, builders and developers with extensive experience in developing land and a proven track record of paying back associated loans. It can serve as a quick way to raise more capital, procure materials and settle fees.
How can first-time developers increase their chances of obtaining development finance?
As a first-time developer, you must be able to demonstrate that you have a clear, realistic development strategy.
- The importance of precise costing and a thorough understanding of the market you’re targeting is key. Lenders will pick up on any inconsistencies in numbers, and they will be unimpressed if your plan does not fit the market.
- Lenders will want to see that you have a thorough understanding of the costs associated with your project and that you can be relied upon to keep costs under control throughout the duration of the project. Overconfidence is one of the most common difficulties among rookie developers. They frequently underestimate total expenses and fail to account for suitable contingencies, which an experienced developer will know are almost always required.
- A schedule of work is the most professional approach to providing this information. This will necessitate a precise description of the project’s work and expenditures and predicted timelines. The lender’s valuer will determine whether the proposed budget is feasible and whether the time frame can be met. The more precise and exact your figures are, the better.
Your knowledge and experience
- You should have some expertise with construction projects and prior project management experience would be advantageous.
Your exit strategy
- Your exit strategy is how you intend to repay the loan. In most circumstances this is achieved by the following methods:
- Sale of the property;
- Refinancing with another bridging loan or development finance (mainly in refurb/development scenarios) to obtain either a longer-term to complete the build or to allow more time to sell;
- Arranging a longer-term finance solution such as a traditional mortgage.
Finally, some thoughts…
First-time developers can utilise development finance to obtain the funds required for your project. However, it is essential to be fully prepared to increase the chances of obtaining the finance. To further increase your chances, you can benefit from speaking with a development finance broker who can help you package your application to increase the chance of obtaining finance from a lender and get your project started.