Securing Capital in the UK can be crucial for growing your business or new real estate development projects.
However, the process of applying for Capital often includes challenges and hurdles,
9 Common errors to try to avoid:
Not obtaining Your Credit Score in advance:
Both personal and business credit scores are crucial when determining eligibility. Lenders simply use credit scores to assess your ability to manage and pay back debt. Check your credit score in advance to avoid any surprises.
A failure to Compare Alternative Capital Options:
Not all funding options are the same, and failing to compare options in particular from Alternative lenders could cost you in the long run.
By comparing different lenders and loan products, you’ll be able to find the capital that fits the project needs and budget. Alternative options could include, Challenger bank, PE lenders, Family Office lenders, Peer to peer, Social money platform. Working with an Alternative Capital specialist could open these doors for you.
Misleading Cash Flow and Financial Statements:
Lenders will assess your business or property development project cash flow and financial health to determine whether it stacks up through to Exit. Submitting inaccurate, incomplete or unrealistic financial statements and cash flows can jeopardise your chances of obtaining the Capital you need.
Ensure that your financial statements are up to date and accurately reflect your business’s or development project revenue, expenses, and cash flow. Lenders will want to see that your business has enough cash flow to cover the loan repayments if serviceable without putting strain on your operations.
Not having correct Documents for the underwriting Process:
In simple terms, failing to prepare the correct paperwork can delay approvals or lead to rejections.
Typical documents can include:
· Financial statements
· Cash flow statements
· Tax returns if applying for business loans
· Bank statements
· A detailed business plan for business loan
· Full development appraisals for development finance
· All Planning permissions, Pictures, Plans, drawings, etc
· Asset and Liability Statement
· Schedule of works (Development finance)
· Cost of works breakdown (Development finance)
· Clearly defined Exit Strategy where applicable
Having the correct level of Collateral:
Unless you are applying for an unsecured business loan, all other products will require the correct level of collateral as security. Business assets may include inventory, real estate, equipment and machinery, outstanding invoices. Directors’ Personal assets could include fine art, gems and fine jewellery, vehicles and wheel-based assets or your home. Ideally, its always best to use business collateral to avoid putting personal assets at risk. Never put down any collateral that you are not willing to lose. When considering property development, Developers must have skin in the game and equity contribution. Although 100% build costs plus part of any acquisition are covered. A lack of collateral can also lead to higher interest rates or stricter loan conditions.
Lack of a strong development plan:
The developer’s vision must be clear when applying for development finance. The project vision and Exit strategy must both stack up without any doubt.
Choosing the wrong or inexperienced vendors:
While partnering with the right vendors can strengthen your case for taking out development finance, choosing the wrong ones can cause more harm than good. This includes everyone from project managers to contractors, interior designers and other service providers. Choosing the wrong partners may result in disputes and the site may get repossessed.
When you involve anyone in your project, clearly communicate their roles and what to expect from the development project. If they don’t agree with your terms, then it is better to let them go. Partner with the people who commit to supporting you throughout the project term.
Underestimating the Total Costs:
Often Real Estate developers can underestimate the full costs associated with a development project, which can lead to shortfalls when it’s time to exit and repay the capital. Be sure to factor into account for land acquisition, construction build costs, legal fees, permits and other fees, and any unexpected unforeseen expenses.
It’s wise to Overestimate costs, including contingency funds, to cover any unforeseen challenges. Always consider any possible impact of fluctuating material and labour costs, particularly in times of market and economic volatility.
Lack of a Clear Exit Strategy:
An exit strategy outlines how you plan to repay the loan once the development project is complete, whether that is through the sale of the property, refinancing, or rental income. A common mistake developers make is failing to present a clear exit strategy to lenders, which raises concerns about how the loan will be repaid.
If you are retaining the asset, clearly outlining your repayment plan and method, showing how and when you will generate funds to repay the loan. Having a contingency exit plan in case your initial strategy encounters difficulties.
If you are selling the asset, your sales strategy must make sense and be realistic. Be sure to include any sales period where required.
A clear exit strategy gives the lender confidence in your ability to repay the loan on exit without delays.
Conclusion
By avoiding these common mistakes property developers and business owners can increase their chances of securing business or development Capital.
NEED CAPITAL FOR 2025. Capiyada gives you access to over 100 Alternative lenders in one place.
Contact us today for any Capital requirements.
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