One of the biggest issues for SME developers tends to be having enough funding to complete a project. Usually, any properly substantiated project should be able to raise finance, the questions are, how much, what will it cost and what is required in support?
The answers will depend on the lenders approached. Typically, lenders fall into one of three categories. The first, your traditional ‘high street’ lender group. The second is well-known banks (without a high street presence) and the third is ‘alternative lenders’ (e.g. funds). Each category of lender approaches the funding of a project differently.
High street lenders
High street lenders are the most risk averse. Accordingly, they usually only fund projects that are low risk and based on low loan to value covenants. The result is that the equity portion of any funding required to be provided by the developer may be quite substantial. However, they tend to provide the cheapest loans. The general rule of thumb is that any funding of less than £10m will be documented using the lender’s standard form documents which are lender friendly. The scope for negotiating the documents it is limited which in turn means that associated advisors’ costs are reduced.
The standard security package required in support of a loan consists of an all assets debenture from the borrower, a legal charge over the development property, collateral warranties, a charge over the shares in the borrower and more often than not personal guarantees from directors/shareholders (e.g. costs overrun and interest short fall guarantees) will be required.
If things go wrong, high street lenders are usually slower to take steps to enforce their security and the guarantees. That is because they are obliged to ‘treat customers fairly’ and are concerned about their reputations in the market place. They’re therefore inclined to give the developer the opportunity and time to find solutions.
Banks without a high street presence
Banks without a high street presence are less risk averse than their high street counterparts. As such, they tend to fund higher risk projects and provide a bigger share of the funding, albeit that their pricing is higher. The funding will be documented using the lender’s standard form documents, which will be more lender friendly than the high street lenders with almost no scope for negotiation. The security package will be the same as the high street lenders, although they almost always require guarantees.
While these lenders do have a duty to treat customers fairly, they tend not to be as concerned about their reputation so they may be quicker to act if things go wrong and may not give the borrower as much opportunity or time to find solutions.
Since alternative lenders are driven by internal rates of return and need to keep their investors happy, their risk appetite is greater and they tend to take on higher risk projects and provide a bigger share of the funding required, albeit they are the most expensive.
Again, the loan will be documented on the lender’s standard form documents, which are very lender friendly with no room for negotiation or amendment. One thing to note with some of these lender’s
documents is that while they ‘indicate’ that they are term loans, in reality the lender has the ability to make demand for repayment at any time irrespective of whether there is an event of default. Therefore, in reality the loan is repayable ‘on demand’.
In addition to the usual security package, the lender will always insist on guarantees.
These lenders have no obligations to treat customers fairly and have no reputation to protect so if things go wrong they will act quickly and give the borrower very little, if any, time or opportunity to find solutions.
In conclusion, each category of lender has its pros and cons, and the suitability of each will depend on the circumstances of each project.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2022.