Property developers often have to manage hundreds of thousands—if not millions—of dollars worth of properties. While that may seem like a lot of money, the truth is that a bulk of this net worth is locked behind assets that are not exactly the most liquid—that is, real estate.
As this is the case, property developers need to be adept when it comes to sourcing alternative means of financing to handle their current and future projects, as well as manage running overhead expenses.
For many, such a feat is easier said than done. But for seasoned developers, they know that there’s a variety of funding solutions that can be tapped into to meet the unique needs of the nature of their work.
From bridging loans to joint venture funding, these financing methods can help provide a boost of funding to keep the business afloat and let projects keep on trucking. If you want to know the way to access these funds, then you’re in the right place.
This article will give you some insights on how you can access alternative property financing. Let’s jump right into it.
When do Developers Consider Alternative Property Finance?
Developers, considering the high-stakes nature of the job, don’t undertake projects that they don’t fully believe will make them earn profits.
This means they naturally have a lot of money to work with, as building multiple properties and owning large plots of land entails having a sizeable capital to be able to get this done.
However, as much as a developer believes in the profitability of a certain project, they won’t always have the immediate capital source to pave the path to strike these opportunities. That’s what alternative financing is for.
With alternative financing, developers can gain access to a tonne of benefits that can help them run their business more smoothly. This includes the following:
- They need faster access to funding: Alternative financing can be quicker than traditional financing since it doesn’t go through the usual way of applying for a loan, which can take days to process. Plus, the funding may be specifically for a certain piece of equipment that the developer needs, making the pathway of repayments clear for both parties involved.
- They need flexible lending options: Unlike traditional banks, alternative lenders assess applications based on their own set of criteria and the project’s potential. They don’t follow extremely strict lending frameworks. This makes it easier for developers to access funding for urgent projects.
- They need money to support a range of projects: Alternative financing can be used to pay for land acquisitions, construction work, renovations, and commercial developments. If a project doesn’t qualify for a traditional bank loan, alternative financing can be the next solution to ensure you get enough funding to see it through.
- They need to maintain a positive cash flow: If your current project has a stagnant or declining cash flow due to constant construction, then alternative financing can preserve your cash reserves and help you stay afloat amidst ongoing financial strain.
With excellent alternative financing options like commercial finance with Ardent Capital Group being easily accessible for property development businesses of all sizes, these alternative financing options are more than capable of meeting your own property business’s growing needs.
4 Types of Alternative Financing for Property Developers
Property developers have access to many alternative financing options.
Not all of them work in the same manner, so it’s essential to do ample research beforehand. This step is necessary to pick the right one to ensure that your property portfolio and strategy are in alignment.
Let’s look into these alternative financing methods that property developers can exclusively access.
- Bridging loans
Bridging loans are a short-term loan arrangement that helps you gain access to a quick sum of cash as you wait for a long-term fund to push through.
This loan type usually lasts anywhere between a month and two years. The purpose of this loan is to solve an immediate need for cash as the business awaits a larger lump sum.
Bridging loans are usually accessed during scenarios when something needs to be paid off soon or secured as quickly as possible—think scenarios like meeting auction deadline dates or securing a cheap property or lot when you’re strapped for cash.
In essence, this loan type covers urgent financial needs because they are approved and released faster. This helps property developers strike at opportunities in a pinch.
- Private lenders
Instead of opting for traditional banks to acquire loans, some developers may opt to seek out non-bank institutions instead.
These institutions often offer more flexible lending criteria—making them sought after for developers who may not qualify for conventional bank loans or need customised loan deals that better suit their needs.
A good thing about private lenders is that they don’t scrutinise credit scores or financial records as much. They also approve loans more quickly.
However, the downside is that these private lenders may carry higher interest fees. They may also carry hidden obligations, so it’s absolutely vital to review the terms of the contract with a private lender before signing up for their deal.
- Mezzanine finance
Mezzanine finance is a type of debt that’s essentially sandwiched between a primary bank loan and the developer’s available cash equity. It’s a financing method that protects ownership as it doesn’t give company ownership to external parties or other equity partners.
In action, if the development project fails, the bank gets paid first. To compensate for this, this type of financing often commands higher interest rates than standard loans. As this is the case, developers should practice caution before considering this financing type, as defaulting on payments may cause your debt to spiral out of control.
- Joint venture funding
And lastly, joint venture funding is an arrangement where a property developer partners with an investor or stakeholder to finance a development project.
Instead of borrowing money through a loan, both parties contribute resources of any form (such as land and expertise) and share the project’s profits once it is completed.
This type of funding can help developers take on larger projects without having to provide a sizeable capital.
The downside to this deal, of course, is the profit-sharing system—so each property sold will have a smaller profit stream in this scheme compared to schemes wherein you’re the only seller.
We hope that we’ve cleared up ways you can access alternative property financing. All the best in leveraging this knowledge to your own advantage with your property portfolio!
