The broker perspective - A small price to pay.

A small price to pay.

What is the case for using a broker when sourcing finance? Boost asks the market for its take on the role of the broker in development funding.

For an SME housebuilder, development finance is often a major hurdle: get it right and the whole process—from site acquisition, through construction, to the last unit sale—is smoothed. Get it wrong and you could miss out on the deal of a lifetime.

There are now numerous funding structures available and even the possibility of removing sales risk as part of the deal - so which will work for you? How do you know what you don’t know?

This is where specialist finance brokers come in – the art of good business is, as the old saying goes, in being a good middleman. Developers are specialists, having spent many years honing their trade; it is no different with specialist finance brokers.

We consulted several industry stakeholders to ask their advice on how best to negotiate the world of development finance.

The broker perspective

Oliver Holden, Arc & Co: Development finance is a fairly saturated market, where it’s hard enough for us to keep up with the variety of new products on offer—and it’s our day job. So, for SME housebuilders to try and keep abreast, while coping with everything else they must deal with, feels [overwhelming]. It’s a better idea to partner with a professional who will be acting in your best interests; even if you have a CFO or similar who is well versed in this, there is still a lot else for them to do, so why not work with a someone whose sole job is to create value?

A broker can focus on what is the best deal for you, that will maximise the return not just on your investment, but on your time as well. An [experienced] broker will look to get the utmost out of any lender or product for their client.

Martyn Pollock, Hallcroft Finance: We provide a tailored service that will offer a number of potential solutions. Without wanting to oversimplify, we save our clients’ time: without a broker, they’ll get bogged down in too much information, and they’ll become pressured for more information from lenders.

One of the things we can bring is the ability to push back. Debt and equity providers will ask for everything they can get on a client’s track record: ‘Show me three schemes of a similar debt quantum they’ve delivered,’ asking for information down to inside leg measurements. That’s all fair enough—if they’re lending £10m, they have that right.

But we can counter: The client wants to know about you: what was your last deal; who’s on the team; who will be running the process?’ Once you can show you’re a serious operator, it puts a bit of pressure back on them and they’re usually prepared to play ball a bit more.

Martin Johnson, Empire Commercial Finance: One of the first things to differentiate is those who generally broker property finance versus those who specialise in development finance. As development finance facilities are larger than most other property loans, it attracts a lot of interest from brokers. We often see a ‘kingdom of the blind’ situation where a developer has trusted, say, a mortgage broker, to source them £5m of development finance. This is no different to expecting your electrician to do your plumbing— same trade, wrong area. Mixed results, at best.

The value we add is typically easy to demonstrate. We get enquiries where the developer may already have terms which act as a baseline. We can then use our knowledge and experience to improve upon these terms, easily evidenced within a viability model. There is often a lot of value in simply knowing where not to take a deal or who not to deal with— things a developer wouldn’t know unless they were in the market every day.

Going the extra mile

A good broker will be prepared to think in creative ways and drop other things when it might make a difference to whether a deal happens or not.

Martin Johnson explains: “In a recent example, I went with the developer on a Sunday morning to see the vendor and negotiated terms for a purchase price and deferred element.

I sorted a VAT loan, and then worked with the developer, solicitor and VAT loan provider, and had to revisit the deferred element of the loan with the vendor and agree an additional amount. What made the difference was a hands-on approach and coordinating all parts to make sure the lawyers could progress to a swift conclusion.

What the lenders say

Vishal Dixit, Pivot Finance: “A knowledgeable broker on a complex scheme can prove instrumental in bringing it to fruition.

For someone relatively new to the sector, using an experienced broker with a wide network of lenders is an obvious solution as there are so many finance providers out there. And, of course, some are much better than others when it comes to reliability, speed, specialism and/or availability of funds.

A competent broker will understand each of their preferred lending partners’ appetites and parameters and thus can source the relevant solution to best suit both lender and developer in the build cycle of a scheme.

Valan Redmond, West One: “Using a broker for development finance can add certainty to the whole process. The last thing any developer wants is to go through quite often a lengthy application process, only to get knocked back. Brokers with a specialist market knowledge will be able to help them avoid this.”

Suraj Lakhanpal, BLG Development Finance: “What a broker can do is introduce a developer to a lender that is most appropriate to their project and experience. And they will help in the closing process for developers who obtain loans infrequently.”

Can you ever get best value without a broker?

Oliver Holden: “Possibly, although it would arguably be down to luck rather than skill. Working with a broker gives certainty of process and, to a degree, success, as brokers tend to only work with cases they think will transact. How happy borrowers can be with it depends on their aspirations at the outset, and a good broker should be setting expectations early. This, in itself, can save the developer a lot of time and money if the site simply isn’t viable.

It comes down to developers having to invest time and resource into something. You have to think about value in what is the best way of maximising your time, money and chance of success.

Valan Redmond: “I’m not sure that even with a broker you can be 100% sure you’re getting the best value, so, by forgoing this, a developer might be at a disadvantage. There’s such a variance of products in the market, and brokers have the expertise and awareness of what’s out there. You could be ‘going in blind’ without good advice.”

Martyn Pollock: “SME developers have to wear a lot of different hats: site finder, planner, site manager, managing director… Simply outsourcing the broker function allows them to focus on what they excel at.”

Suraj Lakhanpal: “Value is not solely about the numbers; it’s as much about service, how a lender reacts when plans change, and how easy the drawdown process is. In times of uncertainty, it is important to have lenders and suppliers you can trust.”

How do you choose the ‘right’ broker?

Oliver Holden: “Word of mouth is a good place to start, whether that be via a lawyer, quantity surveyor, or any professional you know who’s had prior dealings with someone you’re considering. If somebody you trust vouches for a broker, that’s better than going in ‘cold’. Recommendations in a personal and professional capacity go a long way.

What are the perceptions in the market of the firm you’re considering? Do they have accreditations and industry awards? A lot of awards in this sector do hold meaning, because they often involve a process that takes a lot of time and effort.

Valan Redmond: “The old-school approach can be the best way of doing this: word of mouth through your professional network.”

Suraj Lakhanpal: “Recommendations from other developers would be a good starting point, and to seek references to ensure that the broker concerned is a good fit for your business.”

Martin Johnson: “You need to find someone that has experience, ideally via referral from a professional advisor or another developer. You then need to get on with that broker and have confidence in them.

Look at their LinkedIn profile, the website for the company, and have a discussion with them to make sure they understand the project you’re undertaking.

Vishal Dixit: “Go to a show like the Finance Professional Show, or something similar in the property development sector, both nationally and regionally, where many brokers will be exhibiting who you can meet face-to-face.

Check out one of several trade associations who represent finance and mortgage brokers (eg FIBA or the NACFB) or one of the trade publications that cover this market. Then, speak to fellow developers or contacts who they have used and would recommend . . . to find out in depth of people’s experiences—good and bad.

Summing up

Oliver Holden: “If there’s any misunderstanding around brokers, I’d say it’s that people think it’s something they can do equally well in-house, through a director who’s got a mate at one of the banks, or just Googling ‘development finance’, and that it’s all down to negotiation from there.

They might consider it just another cost, whereas, in fact, it’s about adding actual value. It can be a very time-consuming element—time that is taken away from the developer focusing on their core business.

Vishal Dixit: “It will possibly be cheaper to not use a broker, however, unless the developer has extensive knowledge of the lending landscape, they will not know the best ones to approach for the finance they require. Especially if the loan is needed in a hurry, eg if a site has become available at short notice and needs a quick completion, selecting the right lender requires an expert.

Also, if a broker has a good relationship with a particular lender, it’s possible they can get the developer a better deal—a benefit that would be lost by going it alone.

In 2022, members of trade body the National Association of Commercial Finance Brokers facilitated £45bn in borrowing by small businesses, many of them SME housebuilders. Here, Norman Chambers, managing director of the NACFB, spells out what its members can do for clients.

Instructing an experienced and knowledgeable commercial finance broker – particularly one backed by an independent trade body such as the NACFB - is an excellent way for SME housebuilders to extract the best value for their developments.

With their active knowledge of supply chain issues, rising interest rates, and acute labour shortages, commercial finance brokers can help SME housebuilders navigate the complex world of property development financing, secure funding, and mitigate risks.

One of the primary benefits is the ability to access a wider range of financing options. These brokers have connections with a variety of lenders and investors, and by tapping into these resources, SME housebuilders can secure financing that is tailored to their specific needs, rather than settling for a one-size-fits-all solution.

Current supply chain issues in construction have made it increasingly difficult for SME housebuilders to secure materials, leading to rising costs and delays. But by working with a commercial finance broker, housebuilders can explore alternative funding options to get back on track.

Rising interest rates can also be a challenge. A broker can help navigate this issue by identifying lenders who offer competitive rates and terms. Brokers can also assist with negotiating favourable loan terms, such as longer repayment periods or lower interest rates.

Acute labour shortages are another challenge. Brokers manage these issues by providing access to funding sources that can be used to hire additional staff, invest in automation technology, or secure financing for training and development programmes. Housebuilders should choose with care. We would recommend that they work with a NACFB member, giving them confidence that the broker meets a certain standard. NACFB brokers are required to undergo regular performance audits to ensure they operate according to the rules and regulations set out by the Financial Conduct Authority and meet the Association’s Code of Practice.

Coupled with this, the NACFB also works directly with the lenders to foster and strengthen relationship for the benefit of borrowers. We currently have more than 165 lenders acting as patrons.

Should you require a recommendation for a trusted broker, please contact boost@LDSyoursite.com