The other reason they will be keen to lend you money is because you play a far less important role in the process than you might think. When you get a mortgage, the lender’s key concern is your ability to make the mortgage repayments. But with a commercial development loan, the primary concern is whether the deal makes a profit. The secondary concern is whether the team delivering the project is solvent and up to the task (I’m talking about the architect, contractor, project manager, and so on). Only after these two boxes have been ticked will the lender be interested in what the developer is all about. Yes, they’ll want you to be credible and professional, but you’re not the most important piece of the puzzle for them.
There’s also the fact that first-time developers often go on to become second-time developers, so every lender has an eye on their future client base. Most commercial lenders will insist that developers sign a personal guarantee that further protects their investment, while others may, in addition, insist that there is someone with experience on the team who can provide support when needed. The key objective for you as a developer is to ensure that your project still makes a profit, even if there are a few bumps along the way. That’s why commercial lenders insist that developers target a minimum 20% margin since this gives them a significant cushion against unknown cost factors.
Peer-to-peer lending, a.k.a. crowdfunding, is another excellent source of commercial finance. Here, an organisation with development expertise (the crowd funder) pairs investors with developers. Crowd funders are usually more developer-centric, with shorter turnaround times on decisions and often greater flexibility. However, the degree of due diligence they will do on your project is like that of any commercial lender. The investors (typically not experienced in development) have the advantage that each investment opportunity has been vetted by the crowd funder beforehand, which significantly de-risks things for them.
So, at a high level, that’s the commercial finance sorted. Let’s now turn our attention to private finance, the other side of the funding coin. In our bakery example, we needed to raise a £120,000 deposit and were putting in £12,000 of our own cash. And you’ve probably already spotted the large elephant in the room asking you who on earth is going to lend you the remaining £108,000.
Now, most people hate asking for money, which, as it turns out, is quite lucky because asking for money is just about the worst way of getting any. The problem is that no matter how you dress it up, a request for money has all sorts of implications. The first obvious implication is that you haven’t been able to raise the money you need from other people. And this prompts questions such as ‘have lots of other people already turned you down, ‘don’t you have any money of your own and, if you do, why are you asking to borrow mine’ and ‘perhaps it can’t be such a great deal if people haven’t rushed to invest with you’. You come across as a bit needy, and it’s not a great look.