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    • Did you Know?
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  • Contact
  • Home
  • Get Funding
  • Development Finance
    • Introduction
    • Sky TV Interviews
      • Episode 1 - Cost Cutting
      • Episode 2 – Myths
      • Episode 3 - Avoiding Mistakes
    • Finance Market Review Autumn/Winter 2018/19
    • The Basics
    • Solutions When Sales Are Slow
    • Development Finance Myths
    • Preparing for Funding
    • Comparing Lender Term Sheets
    • Assessing Lenders
    • Asset & Liability
    • Explaining Jargon
    • Did You Know
    • Download Report
  • Comparison Data
  • About
    • Introduction
    • Our Philosophy
    • About Chris
  • News
    • Finance Market Review Autumn/Winter 2018
    • BIG Modular Finance News
    • Virtual Reality: A Sales Tool or More?
    • Equity Investment: The Latest
    • Use One Lender Or Several?
    • How Interest Misleads on a Term Sheet
    • £4.54m Facility Agreed
    • Death of Collateral Warranties Part 2
    • Lender Data Launched
    • Lender Data Launched
    • Lender Data Launched
    • Understanding Default Interest Clauses
    • Lender Data Launched
    • A/Winter 2018 Lender Comparison Data Launched
    • Buy-to-Let Tax Exemptions?
    • Time for a Finance Re-Think?
    • Worried about House Prices & Sales?
    • The Death of Collateral Warranties?
    • Finance Market Review Q2 2018
    • Finance Market Review Autumn+Winter 2018
    • Q2 2018 Lender Comparison Data Launched
    • Privacy Policy Update
    • Q1 2018 Lender Comparison Data Launched
    • Finance Market Review Q1 2018
    • Interviewed by Proper Wealth Sky 198
    • £5m Felixstowe Deal Done
    • 3 Lenders, Same Rate
    • Did you Know?
    • Comparing Lender Term Sheets
  • Contact
  • Home
  • Get Funding
  • Development Finance
    • Introduction
    • Sky TV Interviews
      • Episode 1 - Cost Cutting
      • Episode 2 – Myths
      • Episode 3 - Avoiding Mistakes
    • Finance Market Review Autumn/Winter 2018/19
    • The Basics
    • Solutions When Sales Are Slow
    • Development Finance Myths
    • Preparing for Funding
    • Comparing Lender Term Sheets
    • Assessing Lenders
    • Asset & Liability
    • Explaining Jargon
    • Did You Know
    • Download Report
  • Comparison Data
  • About
    • Introduction
    • Our Philosophy
    • About Chris
  • News
  • Contact
0330 043 1017
Brokers for UK Property Developers

Comparing Lender Term Sheets

If you’ve been comparing term sheets from development finance lenders for any length of time, you will notice that there is zero in the way of standard practice across the lending community when it comes to development finance. 

As a result, one of the unfortunate facts of the development finance marketplace is as the borrower you are hardly ever comparing ‘apples with apples’.

The knock-on effect it is really easy to select a more expensive lender, and cost yourself thousands in the process.

 

Why is it so difficult in a little more detail?

Lenders do not present their information in the same way, they do not include the same set of costs in their offer, they use different methods to calculate the costs, and some do not use your cash flow projections to boot when doing so.

The three main issues are as follows:

 

1. No standard practice by lenders for assessing all costs

Some of the more common dangers to be aware of are:

  • Some lenders don’t include exit fees in the total costs, stating they are technically outside the loan.  
  • Some lenders cover QS and/or legal costs in the loan, and some lenders do not.
  • Some lenders require a % of the arrangement fee to be paid upfront, whilst some don’t.
  • Some lenders retain interest and pay back what isn’t used pro-rata, some lenders take interest at the end out of sales
  • Lenders use a variety of non-comparable models when projecting the interest amount.
  • Competing termsheets can often have different lengths of loan, which affects the costs. 
  • If you want an 18 month term, ensure all terms are for 18 months.  Compare apples with apples.

 

2. Not comparing interest, nor the interest rate, at a deep enough level

This is extremely important:

The Termsheet does not provide enough depth to accurately compare lenders.

Is the interest rate calculated on the drawn balance or the facility, or a private equity based IRR model?  Is the interest compounding, or non-compounding? 

If the lenders you are comparing are using different models to calculate interest (and the chances of that are very high), then it is impossible to compare the interest element correctly.

The borrower, therefore, needs to be very careful that they do not miss out of lenders who appear expensive that aren’t, and vice versa.

 

3. Missing the lack of constant in cashflow projections, and it's effects

On top of the varying interest rate models, lenders are also using different cashflow projections too!

There are a number of models here, from the S-Curve Development model to equal drawdowns to your own actual cashflow.  Most lenders aren't using your cashflow model, and are therefore unintentionally predicting interest incorrectly.

The consequence, if you're unaware of this, is a further lack of ability to compare lenders correctly.

Getting this wrong can make the projected interest unrealistically low or high, and can unintentionally affect your decision making when it comes to selecting a lender.

Ultimately you need a constant on cashflow, even if it is projected and in reality will change somewhat during the build.  The only way to do this properly is to make sure every lender is putting in your likely cashflow projections, and providing you with their calculation model as evidence.  You may be surprised to see how much the interest projection changes, for good or bad!

 

What you need to do to compare termsheets properly

  • Use your own template to compare terms
  • Make sure you have accounted for all costs; is there anything missing?
  • Make sure the term length is the same on all offers
  • Put together your own cashflow and supply it to all lenders
  • Ensure they have used your supplied cashflow!
  • Ask them to supply their costing calculator so you can double-check against your numbers
  • Ensure you are dealing with the right lenders in the first place

 

When comparing Termsheets, know the beast you are dealing with

In summary then, the development finance marketplace continues to be a minefield to explore and understand, so ultimately you are able to ensure that you’re choosing the right finance partners.  

If you are to truly compare the 50+ lending options correctly, and the final 3 or 4 in particular, make sure you understand the dangers that lie in wait, and that you are prepared for them.  Your ability to select the right lender afterwards will be greatly enhanced!

If you would like help comparing term sheets, or putting together your cashflow schedules, we have free templates available that can help make the process much quicker and much easier.  If you would like the templates, please send us an enquiry.

 

About Chris

chris davidsonChris Davidson is Managing Director of Discover & Invest Ltd, a specialist development finance brokerage and operator of the Discover Development Finance website.

Chris believes in providing property developers with groundbreaking insights into the marketplace, that will allow developers to make better informed finance decisions, quickly, painlessly and cost effectively.

  • The Basics
  • Preparing for Funding
  • Assessing Lenders
  • Explaining Jargon
  • Did you Know?
  • Lender Comparison Data

Latest Market Insights

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  • 9 Lenders offering 90% Loan to Cost
  • 3 Lenders offering 75% Loan to GDV
  • 6 Lenders offering 70% Loan to GDV
  • 19 Lenders calculating Interest on ‘Drawn Funds’
  • 2 new Lenders in Northern Ireland
  • 1 new Lender with Zero Exit Fees

For UK Property Developers needing £500k to £20m

FAQs

Discover & Invest Ltd was set up in May 2008, so into our 10th year. Our MD Chris Davidson, has been helping property developers for 18 years.

No we have no loyalty to any lender, only the customer. Whichever lenders are the most preferable at the time of enquiry will be the ones we agree to approach.

Renovated our first property 20 years ago, and have worked with developers for 18 years in the investment and finance arenas.

No upfront fees, and usually paid out of the arrangement fee.

The top 40 senior debt lenders, the top 10 mezzanine lenders, as well as the top 10 equity investment and JV funding providers.

There are funders out there who can provide 100% of the funds needed. Contact us to learn more.

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Discover News/Blog

Death of Collateral Warranties? Part 2: Case Law Update

Thu Nov 14, 2019

Case Law Update on whether TPRs will replace Collateral Warranties...or not.

Read More

How to Sort 60+ Development Lenders Quickly

Wed Oct 2, 2019

Stop wasting endless hours trawling the internet when you don't have to..

Read More

Contact Us

Discover & Invest Ltd
85 Great Portland Street
First Floor
London
W1W 7LT
0330 043 1017

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