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Banks and builders, they hardly go together like a horse and carriage, but every builder and property developer will need funding at some point. How do banks decide who to back and how can you make sure you secure that loan when you need to? BB gets some advice from broker Corey Sleep at m8 Finance.
By Madeleine Swain
It would hardly be a radical notion to suggest that most people who go into the building trade do not do so because they love numbers and playing with figures, although this may not be quite as true for property developers, whose very modus operandi is to see an opportunity to build something and then sell at a handsome profit.
But even for those experienced with balance sheets and profit and loss calculations, negotiating the minefield that is the world of finance and banking can be daunting.
When it comes time to negotiate loans and funding, how do you distinguish between the myriad suites of products offered by the big banks, to say nothing of the smaller financial institutions?
One solution is to consult a mortgage broker that can do all the heavy lifting for you. Corey Sleep is a director at m8 Finance, a company that covers multiple industries but has a significant amount of experience in the building trade. “We’re essentially a one-stop shop for finance,” says Sleep. The team of directors at m8 all have specific areas of expertise, covering everything from residential home loans and property investment to superannuation funding, and asset finance for motor vehicles, equipment, plant and machinery.
Sleep is one of three with an extensive commercial finance background. “That’s anything from importers to wholesalers to property developers, and complex property investment portfolios,” he explains.
As an industry, building and development has possibly had the most changes in policies and lending appetites across all the finances, according to Sleep. “Back in the old days, you used to just be able to go to the bank and Mum and Dad could get an equity line against their house and go off and build townhouses. These days the banks won’t lend to them and even mainstream developers are finding it hard, so they engage our services to stay on top of the market and get the best package to get their project done.”
So what does a broker like m8 offer and what does the term ‘lending appetites’ mean anyway?
The latter refers to cycles and banks’ internal policies. It’s all about “how many presales they want in the development, what they’re willing to lend against, what they’re willing to leverage up to the project against, whether that be the end value of the project or a percentage of the total development costs,” says Sleep. “Every one of the majors probably has a change each year… one bank will have a run on and appetite for development for, say, one to two years, and then they’ll cool off a bit and be replaced by another lender who picks up the slack.”
It’s the job of brokers like m8 to always be across those fluctuations and know which is the best place to target for a business looking for finance at any given time.
The other thing to bear in mind, he notes, is of course the great variety in interest rates. “The majors are always probably going to offer cheaper lines of funding, but they’re also the hardest to get approved.”
The difference can range from about five to seven percent to a nine or 10 percent mark with a second tier credit specialist and funds manager like La Trobe Financial. Private lenders will be even more expensive, with interest rates of 12-plus percent.
Understandably most businesses seeking capital then will make the majors their first port of call. But if loans are so much harder to get approved in these institutions, how do you make sure that yours is the one that gets the tick? What are the criteria that will secure you the funds?”
“The main ones that the banks are really looking at these days always comes back to the applicants,” says Sleep. “So the experience and character of the sponsor. Also then the experience of the developer or builder that they’re going to engage. If it’s not a known builder, the complexity of the build, whether it’s got basements or high-rises and that sort of thing. Any Heritage restrictions or council issues.”
And there needs to be margins for errors, he advises. “With the applicant, do they actually have any room for ‘hurt’, so if there are any overruns or time delays on the project, is there a buffer in there that they can go on to get the project done or is it going to fall on the bank to cough up more funds?”
For a broker such as Sleep there are certainly red flags he looks for when considering whether an applicant is likely to secure funding.
“If somebody has had a building permit for quite some time and the project’s never taken off, there are always issues around that,” he says. “Having been in the industry that long, it all comes back to your gut feel on whether you back some people. Most of them are fairly honest. In our game, you’ve pretty much got to take everybody at face value.”
But once you’ve got the loan how do you ensure everything stays rosy? Sleep advises staying vigilant. “It’s a lot about who you know in the industry. There are a number of subcontractors or builders who go broke and then start up a new business the next day. Making sure you know who you are dealing with in the industry is critical,” he advises. “Taking the time to do your research upfront can help you avoid costly headaches down the track…”
Image: 123RF's Roman Khilchyshyn © 123RF.com