Category: Bridging Finance

Case Study – Business Finance Restructure

Introduction

We were approached by the owners of a family run Construction and Property Development Company. They had a Business Finance Loan Secured against their residential property, on a second charge basis. The loan term had expired and they were unable to repay the loan. The loan needed to be restructured and funded by an alternative lender before possession proceedings commenced.

Background

The number of Lenders that would refinance the existing facility was limited for a number of reasons including clients age; refinance of existing business finance facility is outside underwriting criteria; poor company accounts; lack of equity in property; uncertainty about repayment strategy; not willing to offer facility secured against residential property. There were other issues that also needed to be taken into account. Including a Floating Charge that had been registered by a Development Finance Company. And demonstrating that the clients company was viable going forward despite the impact of Brexit and Covid19.

Proposed Solutions

Over a period of two weeks we worked with the clients to generate financial information, including cash flow forecast, profit and loss analysis and business plans. So that we could demonstrate to lenders that the company was viable going forward and that the clients were reputable and upstanding.

The funding options considered included cash flow finance which is very similar to an overdraft facility. However with the level of funding required at £320,000 it would have proven expensive and put our clients in a difficult financial position both short and long term. Unsecured Business Loans were also researched but due to poor accounts, turnover levels and low profit margins this option was not viable. The existing lender was approached with a view to extending the facility or restructuring but this request was refused. We also considered re-mortgaging the residential property but this wasn’t viable due to clients age and level of borrowing required.

Recommendation

Following considerable research and conversations with Lenders. We agreed the refinance with a short-term bridging lender. This lender was prepared to refinance the full amount and take a second charge against the clients residential property. Although the rates were not the most competitive at 1.35%/m serviced monthly and a 3% lender arrangement fee. This new facility has resolved our clients problems and gives them enough time to complete development projects that have been delayed due to Brexit and Covid19.

Property Development Funding Options

Despite everything that’s currently going on in the world and the battering that the UK economy is taking. June 2020 was a busy month for Development Finance Loan enquiries.

What’s been particularly interesting is the mixture of Property Developers that have approached Orchard Business Finance to assist them in raising finance to purchase and develop residential sites.

We are seeing a lot of new entrants into the market who are looking to purchase property at Auction or are canvassing their local areas for properties prior to them being listed by estate agents. The focus of these Developers is to purchase properties under market value, complete renovations and sell the property. The financing requirements vary significantly dependent on the funds that the Developers have available. However, we are seeing funding requirements that range from £45,000 to £135,000 plus additional funds to complete a refurbishment. In most cases we’ve looked at bridging finance to help secure the property and additional funds. It’s not always possible to raise 100% funding but in certain circumstances this has been possible. To achieve 100% funding the lenders will use other security and, in some circumstances, lend against the market value of the property and not the purchase price.

More established Property Developers are looking at stepping up their activities and taking on larger schemes and ground up developments. The developments being presented to us have land/property purchase prices of circ. £500,000 and the development costs range from £500,000 to £1,500,000 including costs. These Developers in many cases don’t have assets of a high enough value to offer up as additional security or available cash reserves to offer a deposit of 30% to 35% on the land/property purchase. As a result, the traditional Development Finance Lenders find these schemes unattractive as the financial risk profile is to high. That doesn’t mean to say that these schemes can’t be funded, they can via a Joint Venture Partner. A Joint Venture Partner will introduce up to 100% of the land/property purchase price and development costs but they do like to see some ‘skin in the game’ from the Developer. Therefore, you might need to introduce 10% of the costs or offer some additional security. A Joint Venture Partner will normally charge interest on the funds that they introduce in the same way that a lender would. Then on completion of the development any profit that is made from the sale of the development will be split with the Joint Venture Partner.

Established Property Developers are approaching us with some fantastic schemes that include luxury apartment developments in city centers through to multi property housing developments. These developments require significant funding and in most cases these Developers have funds that they can introduce therefore de-risking the scheme for the lender. The lenders that we are approaching to fund these schemes include High Street Lenders and Specialist Lenders who are comfortable funding such schemes.

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