For many the acquisition of property forms a crucial aspect of wealth building and for developers, property can be a lucrative means of high yielding profits. However, one common setback for developers is ensuring a positive cash flow when initiating a building project.
"Though a loan may be secured from a funding institution such as a bank, these funds are only accessible upon the secured sale of 80% of the development, or possibly with the development needing to reach a certain stage. This means that, should a developer plan to build a housing estate, 80% percent of the buildings need to be sold before the funds are released to begin with the actual construction," explains Jeffrey Froom, executive director for Prevance.
Funds are required to build a demo unit in order to attract buyers to buy into the development, however they cannot be released until a certain portion of the development has been purchased. Another situation now affects current buyers, developers and sellers of property. With the effects of the worldwide economic downturn property prices have been negatively affected.
Difficult to secure loans
However, those wanting to sell properties are not only finding it difficult to find buyers, but also buyers are having difficulties to secure loans from financial institutions who are still cautious with their loans criteria. For developers, the catch is that prices of construction materials continue to rise while they wait for improved property prices. It is also making it increasingly harder for developers to find buyers upfront to secure 80% of the development.
These initial funds are now more often being financed through the developer themselves or other interested investors which can often cause additional red tape and delays for the developer. The financiers may also want a stake in the upside of the development. But one often overlooked or little understood solution to this problem is the use of bridging finance. Bridging finance can provide a term loan to proceed with the development in order to unlock bank cash.
"Bridging finance is a method of financing, used to maintain liquidity while waiting for an anticipated and reasonably expected cash inflow. Commonly bridging finance is provided for short periods of time. Essentially bridging finance solutions assist you in accessing funds that may only be due to you in the near future," says Froom.
Process is not complicated
"Bridging finance can provide a simple solution to a host of financial delays related to property, and property dealings are one of the easiest transactions upon which to secure bridging finance, whether it be for developments, sales, purchases or even estate agents' commissions. It is nowhere near as complicated, costly or risky as many believe, and the reason many developers or even individuals don't make use of it is simply a case of being unaware of a reputable company to approach to discuss their needs with.
"The best solution is to approach a finance house with your requirements and find out what they can structure for you. Bridging finance offers various solutions related to property for both individuals and developers and a group such as Prevance will have products that are tailored around your specific requirements," concludes Froom.
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