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Property Development Finance: What is it and should I consider it?

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Risen Energy moves focus of new business development from mature to emerging markets

Gary Hemming, ABC Finance Ltd

Property development is a highly profitable industry and property development finance can be used to allow you to take on larger schemes without breaking the bank.

Read on to find out more about development finance, including what it is, how much it costs and a breakdown of some really useful pros and cons.

What is property development finance?

Property development finance is a type of loan, which is secured against property or land in much the same way as a traditional mortgage.

Unlike mortgages, property development loans are short-term and generally used only to fund the build, or conversion or property. At the end of the build, or term of the loan, the properties are usually either sold, refinanced to a cheaper development exit product or longer-term loan. Most development finance lenders will fund a percentage of the site purchase as long as the relevant planning is in place. If not, there are pre-planning products available that allow you to purchase and gain planning.

The risk posed to the lender is greater during the construction phase and the security more difficult to sell in the event of default. As a result, the interest rates charged are usually far higher than mortgages, meaning they aren’t a viable option long-term.

How much does development finance cost?

Property development finance costs can vary from lender to lender. The amount charged is generally from around 5% per annum, right up to 16.2% p.a.

The interest rate charged depends on the perceived risk of the application. The lender will usually look at the site location, clients experience in similar projects, loan size and the overall loan to GDV (end value).

On top of the interest charged, there may be other fees to consider.

Most lenders charge an arrangement fee for setting up the loan, this is usually 1-2% of the total facility amount.

In addition, some lenders will also charge a redemption fee when the loan is redeemed. This loan is again usually 1-2%, usually of the loan amount, but is sometimes charged on the gross development value.

When using a broker, they will often take their payment directly from the lender. Sometimes a broker fee will be charged, either because the most suitable lender does not pay them, or just because that is the brokers charging structure. Where a broker fee is due, expect to pay 1-1.5%, with the fee usually added to the loan.

How much can I borrow?

The level of funding offered is generally restricted by the value of the security, both the value on day one and the gross development value.

To manage the loan to value throughout the build, the loan is usually released in stages at regular intervals. The stage released payments are usually either broken down by monthly releases or against set benchmarks on the build.

When initially drawing down your loan, most lenders are happy to lend up to 65-70% of the day one value or purchase price. In addition, some lenders will release the full build costs, subject to the overall loan to GDV (the ratio of the loan vs the final scheme value).

To ensure the stage released payments are managed correctly, and that the project remains on track, a monitoring surveyor is usually appointed. Their job is to check the progress of the build, the quality of works and the ongoing value of the site.

It is usually possible to borrow up to 70% of the gross development value as a total facility, although the cheapest products are usually capped at 55-60%.

How do lenders assess development finance applications?

Each lender has their own methods of assessing applications, although there is a large crossover in the information requested by them. Generally, expect to have to provide the following information:-

  • Personal details – such as the name, date of birth, address of yourself/the directors of the company (where purchased through an Ltd company).
  • The details of any planning permission – including any planned revisions or future applications.
  • Detailed costings and timescales for the scheme – usually the lender will expect this to be broken down by both month and what the money will be spent on.
  • Details of your professional advisors – such as architects, accountants, solicitors and contractors.
  • An up to date development CV for all borrowers – This should give detail on previous schemes undertaken.

Do I have to make monthly payments?

The monthly interest is usually added to the loan, meaning there is nothing to pay on a monthly basis. Although the interest could be paid monthly in theory, adding it to the loan is considered simpler as developments tend to have poor cash flow, with all the money coming in at the end of the project.

Are there any drawbacks to taking out a property development loan?

Yes, by taking out a property development loan, you will have to answer to the lender throughout the build. To release the next stage payment, you will have to arrange site visits, remain in communication with the lender and provide updates on the build. Although this isn’t too onerous, it is another thing to manage during an already busy time.

The second drawback of taking out property development finance is that lenders require a lot of information to assess an application. Although this can be tricky, the reality is that if the project is well planned, most of the information required will already be available.

Thirdly, obviously using finance will incur fees and interest which will cut into your overall profit.

Why is property development finance so popular?

Property development loans can create potentially large profits for property developers, by opening up the possibility of taking on larger schemes. Even where a project could be funded without finance, by putting less money into the scheme you may be able to fund multiple projects.

Also, property development can create large profits for the developer, but requires a long period of outlay, with the profit coming at the end. This can cause cash flow to be poor during the build, something that can be resolved by financing the site.

Finance

Beyond Transactions: The Payment Revolution

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Beyond Transactions: The Payment Revolution 1

By Marwan Forzley, CEO of Veem 

The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.

As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.

For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.

With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.

A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.

If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.

Putting the user in the driver’s seat

Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.

The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.

For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.

With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.

Marwan Forzley

Marwan Forzley

Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.

Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.

In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.

Relentless transparency

Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.

Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.

This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.

Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.

Separating the signal from the noise

2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.

As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.

Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.

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The UK’s hidden payments crisis: why businesses should rethink their payments strategy

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The UK’s hidden payments crisis: why businesses should rethink their payments strategy 2

By Edwin Abl, Chief Marketing Officer at Modulr.

As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.

A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.

Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.

The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.

Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.

The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).

These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.

The 5 key steps UK businesses can take to drive payment efficiencies

There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:

1 – Locate hidden payment process inefficiencies

Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.

Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.

For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.

2 – Make payments key to stakeholder experience management

Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.

Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.

Edwin Abl

Edwin Abl

Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience

3 – Integrate and automate to support payment innovation

Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.

Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.

Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.

A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.

4 – Bring business leaders together

Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.

5 – Innovate by adding finance and payments to vertical services

Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.

This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.

Moving forward – engaging technology to drive efficiencies

If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.

However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).

By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.

To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.

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Finance

Gain financial regulation qualification online

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Gain financial regulation qualification online  

Warwick Business School in partnership with the Bank of England are delighted to offer two online specialist Postgraduate Awards, which are perfect for anyone working in financial regulation to evidence their professional development.

  • Financial Conduct, Leadership & Ethics – Starting in February 2021
    You will debate and cover questions such as how do financiers judge ethical questions in financial markets? What are the implications for regulators and for clients?
  • Financial Regulation & Supervision – Starting in June 2021
    You will develop a comprehensive understanding around financial regulation by looking at topics such as its tools, benefit and practical application.

Studied online over a period seventeen weeks, you will gain a detailed knowledge of the subject, learn industry best practice and gain a qualification to evidence your understanding.

The wider Global Central Banking & Financial Regulation qualification offers three start dates and four qualification levels.

Gain financial regulation qualification online 4

Invest in your career

Find out more about these Awards and the qualification levels offered by Warwick Business School in partnership with the Bank of England, by downloading the brochure here.

This is a sponsored feature

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