One advantage of dealing with a wide range of developers is that it gives us an understanding of what strategies work well when it comes to securing construction finance. As with most things in life, we tend to hear more about the success stories, while mistakes get quietly brushed under the carpet. 

However, there are important lessons to be learned from mistakes, so we thought it worth sharing some of the more common ones we see developers make when seeking construction finance.

Indecision

By far the most common problem we see is developers grappling with commitment. A big secret of success so many miss in the development industry is that the sooner you start a project the sooner you can realise your profit and move on to your next project. The amount of opportunity cost involved in not making a decision is often severely underestimated, and the finance is a key decision.  

Not having a clear plan of attack

We often see developers change their strategy halfway down the track. Often this is because the developer was never clear on their objectives from the outset and was reacting to the various market forces influencing the project. A good example is not doing the homework on what product the market is demanding and establishing a sales and marketing strategy that matches it including a plan B for changes in that appetite. 

Having a clear flexible strategy is what all construction lenders look for when assessing a transaction and this extends to the rest of the project elements. Lenders chase deals where their risk is minimal so if you want your project at the top of their list with the best possible pricing, show them that you have a plan that covers off all the risks.

Come clean about the bad as well as the good

All developers are passionate about their projects; however, we often see that they are so excited about ticking all the boxes to get the project approved they neglect to disclose potential issues that could impede that approval. Alternatively, they think that disclosing a negative such as a previous project failure will result in an instant 'no'. 

Our experience is that in most cases early disclosure and a clear explanation of the circumstances behind the issue can overcome those concerns. On the other hand, lenders do not like surprises and if they stumble across one it is natural they will become concerned there may be others which will influence their decision. Keeping potential issues hidden until late in the process is a sure-fire way to kill the deal.

Pricing – getting hung up on the rate or other developers down the road getting a better deal

All projects are different and generally get assessed on their own merit. Just as developers should decide to do a deal based on the return on equity relative to the risks, lenders also assess deals based on risk return.  
As the old saying goes, “you get what you pay for”, and the cost of funds is only one consideration. The reality is that in some cases, decisions such as the amount of equity required or the level of pre-sales required can have a significant impact on whether the project can be successfully funded. In some instances, it might also be worth your while to pay a little more for the funds in exchange for a relaxation on some of the other facility terms.

It also makes no sense to let a good project go or stagnate because the developer down the road or a mate tells you he got a cheaper deal. We are not saying don’t compare the cost of funds in the market, but having done your homework and received an offer to fund, why let it go? Developers often find that the time and cost involved in doing this outweighs the potential savings, which brings us back to indecision and having a clear plan of attack. Don’t dither, do!

The misconception that only second-class citizens use non-bank finance

Another common misconception is that elite borrowers only use bank funding. In fact many of the top developers in Australia work with a combination of major banks, non-banks and private funders.

Again, it comes down to the individual project requirements and maximising their return on capital.  

Banks have certain criteria they need to adhere to and there are things they cannot do, period. If your project has criteria that a major bank cannot satisfy, the non-bank alternative will usually provide a solution that would be perfectly suitable with an acceptable cost benefit outcome. Similarly, private lenders fill a role for developers with a project with strong metrics but limited equity. The trick is, understanding who can do what and getting good the right advice before you commit to a course of action.

Going it alone

A discussion about common mistakes developers make when securing finance wouldn’t be complete without mentioning the value a good finance consultant brings to the table. Without being actively involved in the finance markets on a daily basis, it’s impossible to be up to date with the differing appetites from such a wide range of lenders. So just as developers find value in engaging good town planners and engineers, the value in engaging an expert finance consultant to secure the best possible solution for your project cannot be underestimated. As with any consultant, the key is making sure that they understand your deal and have the track record to deliver.

Please feel free to contact us, when you consider finance for your next project.  

This article was written by Dan Holden of HoldenCAPITAL, a bespoke construction finance firm. HoldenCAPITAL arranges construction finance and invests in projects through their equity trust, HoldenINVEST. To discuss your project finance requirements please call (07) 3171 4200 or visit www.holdencapital.com.au.

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