Finance Brokers: How to Select a Private Lender for Your Developer Clients
Back to Marketing InsightsSelecting the right lender for your developer clients involves understanding their specific needs and matching them with lenders who offer the flexibility, speed, and expertise required. Whether your clients are small scale developers, engaged in multi-unit projects, or require land subdivision finance, the right private lender will provide the essential support to bridge their financial gaps and drive their projects to successful completion.
But, what factors determine the “right” private lender? And what should you, as a Finance Broker, consider as a part of your due diligence? First, let’s get the lay of the land by considering your main client types.
Types of clients.
- Small scale developers are typically involved in smaller projects, like developing six or less townhouses. These projects, while manageable, still require significant funding, often through private lenders due to the personalised attention and flexibility they offer.
- Multi-unit developers work on larger projects, including multi-unit developments with more than six townhouses or apartment buildings. The scale of these projects necessitates more substantial funding and often involves more complex financing structures.
- Land subdivision developers acquire and develop large parcels of land into residential communities. This type of project requires extensive capital, particularly for the initial stages of planning and development, making private lending a valuable resource.
- Non-developer, such as business owners, may require private lending as a bridging facility. This could be to clean up their financial situation, consolidate debts, or manage temporary cash flow issues before sending them back to a bank. These clients are less common, but still represent an important segment of the market.
Private lending as bridging finance.
For all these borrowers, private lending often serves as a financial bridge. The term “bridging” refers to the short-term nature of these loans, which help clients transition from one development phase to another.
- Acquisition to construction: For developers, bridging finance can cover the period between acquiring a site, obtaining the relevant planning approvals, securing construction funding and lending against residual stock. Each phase is crucial as it enables developers to move forward with their projects without delays caused by funding gaps.
- Construction phase: While not strictly considered bridging in the traditional sense, a construction loan is structured to assist developers in funding the full cash flow requirements of the construction, ensuring they have the necessary funds to bring their developments to fruition. This could include marketing costs, agent fees, authority and consultant fees, amongst other project costs.
Four things to consider when choosing a private lender.
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The size of the loan.
Different lenders have different capacities and processes, each of which can significantly impact the speed and efficiency of securing necessary funds. Finance Brokers must consider a range of factors to ensure they recommend the best possible lender for their clients’ unique situations.
Small loan lenders.
Smaller loan lenders typically handle a large volume of small loans at one time. While these loans may be less expensive, the trade-off is that they mainly apply to simple assets and scenarios. The application, approval and settlement process can be achieved with the benefit of time. Additionally, small loan lenders might conduct less rigorous due diligence, but they will also be less flexible and provide lower leverage loans.
Mid-size loan lenders.
Sitting in the “sweet spot”, mid-size lenders like Bowery Capital typically cater to loan sizes from $2 million to $30 million. This range covers a broad spectrum of client needs, from smaller developments to substantial projects.
These lenders are able to better balance flexibility and complexity with a view of structuring the loan during the due diligence process to cater for an evolving scenario. This is crucial for developers who have dynamic projects with specific funding requirements. Unlike their larger counterparts, mid-size lenders offer a more personalised service, ensuring that clients receive priority support to meet tight deadlines.
Large loan lenders.
Large loan lenders aren’t volume lenders but have the capital to manage large scale projects. However, larger loans often come with more extensive due diligence. While this ensures a thorough evaluation, it can also mean more stringent requirements for developers.
Loans above $30 million tend to be cheaper with larger lenders due to the lower cost of institutional capital. However, the lower cost can lead to more “bank-like” credit requirements. Large lenders tend to be less flexible and more bureaucratic due to their operational structure which leaves the transaction parameters uncertain until the final approval comes through. They tend to be less adaptable to the unique needs of small and mid-size projects.
2. The project’s simplicity & urgency.
Not all developer clients will require a boutique solution; the decision largely hinges on the simplicity and urgency of the project.
For example, developers acquiring or refinancing development sites will seek a simple loan secured against that asset known as an “asset lend” to meet their requirements. The assessment of these assets are typically simpler due to their non-construction nature. These loans don’t require the specialised attention that boutique lenders provide. However, they do require certainty and the availability of capital from the lender.
Bowery Capital is suited to funding acquisitions and the refinancing of development sites as it has both the capital, the capacity and is able to provide the up-front certainty to fund loans over a broad spectrum (i.e. between $2m – $30m)
3. The developer’s experience.
Experienced developers might have a smoother path with larger, less flexible lenders, whereas less experienced developers usually benefit from the bespoke services of a boutique lender and more personalised care.
However, while the developer’s experience is an important consideration, it can often be mitigated by other factors. Consider the experience of the developer’s team, for instance. Even if the developer has specific experience relevant to the project, they may have a seasoned builder and project manager.
4. The risk appetite of lenders.
Finance Brokers must understand the risk appetites of different lenders, the benefits of these appetites, and be able to match the transaction to the lender’s appetite.
For example, traditional banks often require extensive risk mitigation, which can delay project commencement. In contrast, private lenders are more willing to take on projects at earlier stages, before significant risk mitigation measures (such as securing pre-sales) are in place.
This flexibility is crucial for developers who have viable projects but face challenges in pre-selling units in a tough market. In other words, private lenders are willing to take on more risk, which means developers don’t have to. By taking on these risks, developers can move forward without the burden of extensive pre-sales, accelerating project timelines and reducing holding costs.
Metro vs Regional Factors
Whether a project is regional or metro can greatly affect its commercial viability and the associated risks. Projects in metropolitan areas generally have higher demand, better infrastructure, and more predictable market conditions. However, they also come with higher costs and more competition. On the other hand, regional projects can offer lower costs and less competition but may face challenges such as lower demand, less developed infrastructure, and greater market volatility.
Some lenders specialize in understanding the unique commercial factors and risks associated with either regional or metro projects, while others may not be as adept. Finance Brokers must consider whether a lender has the capability and experience to accurately assess the viability and risks of a project based on its geography.
Choosing a lender who understands these geographical nuances can make a significant difference in the success of the project.
Considering risks on all sides.
When quality private lenders assess a project, their personalised attention means they do so from their own perspectives as well as through the lens of the developer. This thorough due diligence helps lenders identify potential risks and suggest mitigation strategies for both sides, ultimately benefiting the developer and project as a whole. For Bowery Capital , for example, this has historically led to recommendations such as hiring a project manager or tightening construction contracts to save time and money.
Making all the pieces fit together.
In a nutshell, Finance Brokers need to evaluate where clients fit on the spectrum of simple to complex projects. This involves understanding the project’s size, intricacies, and urgency, as well as the developer’s experience. Due diligence across these areas will guide you in recommending the right type of private lender.
The key is to match the loan’s complexity with the lender’s capabilities. Generally speaking:
- Simple projects have the luxury of going with smaller, more straightforward lenders or large “vanilla loan” lenders.
- Complex projects need the expertise, flexibility, and personalised attention of boutique lenders to ensure the project’s specific needs and deadlines are met.
Let’s help your clients succeed.
Exploring private lender options for your clients? As a mid-size boutique lender, Bowery Capital offers tailored, flexible solutions for complex and urgent projects, providing cost-effective options while balancing time-sensitive needs.
Talk to our directors to experience the benefits for yourself and explore how we can work together (and help your clients succeed!).