Our old friend, branding (see part 1 of this series), takes centre stage again when you engage with both brokers and lenders, and it’s a massive own goal if you’ve not got this sorted before you start looking for finance. Website, business card, smart attire, firm handshake; everything will be judged, and it’s possible to look totally professional even without having any personal development experience. Remember that you’re an entrepreneur bringing a team of professionals together to take advantage of a development opportunity; the lenders won’t expect you to lay any of the bricks personally. Look and act professionally, and you’ll stand out from the crowd.
This professionalism applies equally to the way you present your business and your project. How thorough and accurate are your calculations? How deep is your due diligence? What work have you done to show that your selling prices aren’t overly optimistic? And how have you presented your business and the professional team that will make the project happen? You won’t be surprised to learn that as a training company, we spend a lot of time making sure that our students get this part right – it can be critical to securing the finance you need.
Before I move on to private investors, I need to mention crowdfunding, aka peer-to-peer lending. This is a more recent yet highly credible alternative to the banks, although the lending arrangements are broadly similar. Crowd funders attract investors on the one hand and property development investment opportunities on the other. Their internal experts kick the tyres of each developer’s deal just as a bank would, before offering it to their lenders to invest in. The business takes a commission off the top, and the lenders get a healthy rate of return, confident that both the developer and their project pass muster. Crowd funders try to differentiate themselves from the banks and promise a more developer-centric model, plus they can often give rapid decisions in principle. You should certainly have them on your shopping list.
No article on development finance would be complete without the mention of personal guarantees (PG), and these bad boys can sound a bit, well, scary. What is a personal guarantee? It’s a commitment you give to a lender that you’ll repay the money from your personal assets if there are insufficient profits from your development to repay their loan. Can they repossess your home? No, but they could theoretically get a court order to make you sell your assets. If you have a JV partner you will be jointly and severally liable, and you will even be required to have your PG explained to you by a solicitor so that you understand what you’re taking on. So, in short, they’re pretty serious things.
But here’s the thing. The reason you’ll be asked to give a personal guarantee is NOT because your bank can’t wait to get its hands on your assets. That’s actually their second worst outcome. Banks are rubbish at property development, and their worst-case scenario is you suddenly deciding you find development too difficult, chucking in the towel and throwing them the keys. So, the way they can prevent you from simply walking away is to have a nuclear deterrent like a PG to hand. Banks are no strangers to development. They expect projects to have bumps in the road, and all they ask is that a) you tell them about them and b) you come up with a plan to solve them. Bury your head in the sand at your peril. But if you’re open and honest, your lender has a vested interest in working with you to see the project through to completion. Your commercial lender will insist you give a PG, and your private investors may ask for one. In short, they come with the territory, and if you’re not comfortable with that, then you won’t get any funding.