Non-bank lending – Pros and cons of borrowing from a Bank
|By Development Finance Partners / Matthew Royal|
How Development Finance Partners panel of non-bank lenders can benefit you
Firstly the pros of Bank products, well that’s fairly obvious ….a lower interest rate.
So what are the cons of borrowing through a Bank at a lower interest rate? The cons are less obvious however are extremely important when it comes to assessing overall financial returns.
A key driver to a developer’s internal rate of return on your cash equity is simply how much cash you need to invest and how long it will be tied up for until it can be repaid and a profit realised.
Based upon on a hypothetical example of developing a single dwelling (based upon a land cost of $200,000 and a turnkey building contract of $300,000) if the developer financed the project through a Bank at an interest rate of 5%, the developer would be required to contribute and additional $30,000 in cash towards the total development costs than if they financed with a less conservative Development Finance Partners panel non-bank lender.
An increased equity contribution of $30,000 results in a significant reduction in the rate of return to the developer’s equity. The overall reduction in project net profit resulting from a higher non-bank interest cost is many times offset by the developer being able to generate additional project profits faster with the benefit of being able to employ an additional $30,000 in cash.
Another key advantage of lending through Development Finance Partner’s non-bank lenders at a higher interest rate is the relative ease of being approved for finance. This is especially the case with respect to how a Bank qualifies the developer’s serviceability which dramatically limits their assessed borrowing capacity.
Development Finance Partners panel of non-bank lenders financing products allow for all interest and financing costs plus a contingency to be capitalised into our clients facility limits during the period of construction. Development Finance Partners non-bank lenders therefore do not require the developer to prove an ability to service a multiple of times the monthly interest costs during construction.
This greatly improves the developer’s monthly cash flow position which is obviously a huge advantage for developers who have lumpy cash flows washing through their accounts.
The financial advantages of non-bank lending products relative to the lower interest costs of Bank financing products are magnified as a developer progresses into larger projects.
If you would like to discuss your development finance needs with us, please get in contact with us!
Could your next project benefit from some expert development finance? Get in touch.
For expert advice:
Level 3, 31 Alfred St
Sydney NSW 2000
P / 02 8916 6246
Level 30/35 Collins Street,
Melbourne VIC 3000
P/ 03 8692 0082
Level 18, 175 Eagle Street
Brisbane QLD 4001
P / 07 3041 4136
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