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The Pros and Cons of Non-Bank Lending Explained

 

 

Written by David Lovato – CPC Development Lending Solutions

 

As any developer knows, finding the right finance is critical to your project getting off the ground. But getting all the funds in place can be a time-consuming and frustrating process. With the RBA starting the rate rising cycle in May cheap commercial loans via bank funding are becoming more expensive and less attractive.

Non-bank lenders have taken a growing market share since the GFC as bank regulations tightened over the last decade.  This has lead to more competition which is great news for you, because borrowing through non-bank lenders offers some big benefits. Interestingly as bank lending tightened, non-bank lending loosened leading to a wild west mentality. Not all lenders are reputable, there are many pitfalls but doing deals with the best non-banks can be rewarding and will help you grow your business.

 

The advantages of non-bank finance

 

Non-bank lenders are typically privately owned and operated. So they can offer credit with fewer strings attached than traditional banks, such as:

 

  • Lower pre-sales requirements to start construction
  • Lower equity requirements, freeing up cash to drive your future development pipeline

 

What’s more, you get to deal with funders who understand property partnerships, repeat business and an entrepreneurial mindset. So they will generally approve or decline your application within days (not weeks or months like the banks).

 

Non-bank lenders also generally adopt a whole-of-business approach: they focus on the bigger relationship rather than the individual transaction. So If things don’t go to plan, you can work with them to ensure a win-win outcome.

 

 

What’s the cost of a non-bank loan?

 

Lenders charge various upfront and ongoing loan fees, so the cost of a loan isn’t just about the interest rate. The devil is in the detail, because steep charges and loan fees can eat into your profits, making your project unviable.

 

Three factors determine non-bank rates and fees:

 

  • The loan’s risk profile
  • The project’s profitability
  • The borrower’s financial strength

 

A word of warning. Some lenders are deliberately vague about the applicable fees and charges, leaving you to discover them for yourself after you’ve committed to the loan.

 

For example, many loans come with a discounted interest rate that reverts to a higher rate if the loan terms are altered without mutual agreement during the loan term.

 

So it’s vital you’re clear on all applicable fees, charges and conditions before you apply. A specialist development finance broker such as CPC can help with this.

 

 

Five common mistakes to avoid

 

CPC has heard countless horror stories of developers trying to save money by arranging finance themselves, rather than through a specialist finance broker.

 

This usually ends badly.

 

That’s because these developers often end up making mistakes such as:

 

  • Falling for too-good-to-be-true deals

Some non-bank lenders lure borrowers by promising them fees and interest rates that seem too good to be true. Sadly, these lowball offers are generally scams.

 

  • Getting overcharged

You should also be wary of lenders that charge large upfront fees or seek caveats on your property to secure their fees before getting started on due diligence. Reputable lenders charge only a nominal upfront fee (to make sure the borrower is serious), which then gets refunded at settlement.

 

  • Signing up for punitive penalty clauses

Watch out for clauses in offer letters or loan agreements that impose heavy penalties for breaches of loan terms.

 

  • Committing to long minimum interest periods

Be careful of loans that require you to pay interest for a minimum number of months, as you might end up being penalised for paying down debt early.

 

  • Working with fake lenders

Some unscrupulous brokers portray themselves as lenders and charge large upfront commitment fees. Once you’ve paid, they find excuses not to write the deal.

 

 

Why work with CPC?

 

Even the most experienced property developer finds it hard to choose the right non-bank lender and loan product. That’s because there are many lenders on the market, each offering different loan products, borrowing criteria, interest rates, and fees and charges. But you need to get it right, because you don’t want to make an expensive mistake that prevents your project from breaking ground.

 

That’s where CPC comes in.

 

We’re a specialist development finance broker, and have been arranging funding for our clients since 2014.

 

We work only with well-established, reputable non-bank lenders that have:

 

  • Operated through different market cycles
  • Got a strong track record for managing loans from beginning to end

 

So you can be confident the lender we find for you will have:

 

  • Sufficient funds available
  • Demonstrated cashflow management
  • A loyal, long-term investor base

 

CPC unashamedly charges a nominal upfront fee. This ensures we can dedicate time to your project, so we can better understand you and your objectives.

 

We can then match you to the right lenders, presenting your project in the best light so they are keen to win your business.

 

Download our in depth lending guide here to learn more about current rates and jargon used in the development lending space.

 

Need development finance? CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected]

How to choose the right builder for your next commercial development

 

Written by David Lovato – CPC Development Lending Solutions

 

Have you ever wondered what might happen if your builder went bust halfway through your project?

 

I have first-hand experience of this problem.

 

Back in 2009, during the GFC, I was a young project manager working for an ASX-listed developer, when a builder that was doing three of our projects entered administration. All our sites got locked overnight. It turned out the builder owed $30 million to their creditors. We were shut out of our projects for six months, until we were able to legally take back possession of the sites and engage a new builder. It was a costly lesson.

 

Why do I bring this up? Because the current chatter within the industry is that lots of builders are struggling to pay their bills right now, largely because construction costs are at their highest level in 21 years.

 

So the thing that happened to my employer all those years ago might happen to you too.

 

How to protect yourself from financial risk

Don’t choose a builder based solely on a Google search. There’s too much money at stake for that. Instead, do thorough due diligence.

 

Here are three steps you should take to minimise your risk:

 

  1. Check their financials

 

It’s perfectly legitimate to ask a builder to provide their most recent tax return and a consolidated cashflow forecast. Be wary of builders that are reluctant to provide this information. You want to understand who their other clients are and whether they’re properly resourced to manage multiple projects. You also want to find out how much revenue they’ve forecast for the next two years, because, with some builders, their cashflow might be destroyed if even one client refused to make a progress payment.

 

  1. Check their legals

 

It’s important to understand your builder’s company structure and class of licence. Be wary of builders that set up shelf or subsidiary companies for their building contracts. You should always understand who the directors are, and if they’ve had any insurance or legal claims against them, whether with this company or another one. Also, take the time to review the individual licence details of the nominated supervisor to make sure that person hasn’t had any historical compliance issues.

 

  1. Do a credit check

 

Engage a credit and risk assessment firm like Newpoint Advisory or Dun & Bradstreet to do a background check on any builder you’re thinking about engaging.

 

Don’t forget to do these background checks as well

There’s more to due diligence than just doing finance and legal checks.

 

When you research builders for development projects, you should also do these three things:

 

  1. Check for relevant experience

 

Of course, you want to choose an experienced builder. But you also need to make sure your builder is experienced in the specific project you’re planning. For example, if you’re going to develop apartments, don’t engage a builder that only has house experience. Choosing a specialist will mean your builder will understand the building codes and design issues relevant to your type of project, and will also know subcontractors with relevant experience.

 

  1. Visit previous projects

 

Any builder you talk to will tell you how great they are (and will probably have some nice-looking photos too). But you wouldn’t be conducting proper due diligence if you took their word for it. So take the time to visit some of their finished projects. Also, speak to building and strata managers to find out how responsive they’ve been when residents have moved in and they’ve been asked to fix any problems that have cropped up. That will tell you how committed they are to delivering quality work and maintaining their reputation.

 

  1. Talk to other clients

 

Ask your builder to provide contact details for two or three other clients. When you speak to those other clients, ask them what sort of quality the builder delivered, how they managed the project, what their service was like and how their subcontractors acted.

 

CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected].

Core Logic – Monthly Housing and Economic Update Sept 16

corelogic

The monthly update on the state of the national housing market has just been released. The key findings can be summarised as

  • Residential real estate underpins Australia’s wealth and has reached $6.7 trillion
  • The annual rate of capital gain has slowed from its peak but remains quite strong
  • Values continue to fall in Perth and Darwin on an annual basis whilst rising across the remaining capital cities
  • Turnover: capital city transaction numbers have continued to trend lower
  • The decline in capital city rents continues with asking rents down 0.5% over the past 12 months
  • Lending to owner occupiers and investors has started to pick-up again

To read the full report click here