Getting Lending. What are the banks looking for?
Getting Lending. What are the banks looking for?
There are some key points that you need to consider and think about when it comes to connecting and getting lending from banks. There will be certain key elements that the bank will be looking for which is why you need to be aware of it, so that you can be prepared.
The first thing to mention that the banks will be looking for is credibility. So here, I am talking about a CV, who are you in the professional space? It may be that you are thinking that you haven’t done much in property, but I am fairly confident that actually if you think about it you will have same form of professional background that will hep you in this space. Something to mention is that the bank is not just interested in your property knowledge, they just want to know who they are dealing with. You need to go into the bank with the ability to show the bank how credible you can be within the property space.
The next thing to consider is your finance records. It may be that you have had some negative financial things happen in your life such as written of debt in the past or a poor credit rating. So, you need to start looking into this immediately and try to improve it. However, we are where we are and its all about being as honest as you can and speaking to the bank letting them know the reasons to why things went negatively in the past, why that’s not going to happen again and then further explaining what you are going to do going forward to correct that.
The next thing to understand is that the bank is not just going to be looking at you as a person. For example if you are working with a development company, so if you have a principle contractor coming into the deal with you they will want to know everything about them and all of the other people involved in the deal. this can be a very positive thing because it can really strengthen your position.
For example, if you are walking into the bank with your first property deal, but you have a great building firm around you who have done lots and lots of different developments and who have been in the development space for a long time, their credibility is going to help you to leverage better lending. If you are looking in the planning space and your particular lender is looking to take planning risk, then again, they want to know about your architects and your planners. They will want to know things such as their qualifications and see their plans. All of these questions will arise when you speak with your bank so its important that you ensure that you are working with a great team. So here is a top tip from me, before you walk into the bank I would collect CV’s from everybody that I am working with so that I am armed and well equipped to answer the questions, when it comes to the rest of my team. This is really important because your team could be your key to securing financial success for your deal.
One of the big things that the bank will be considering is how they get their money back. The bank know they have the funds to lend the money to you, they might know if you can facilitate the loan, but what they certainly want to know is how you will give them their money back.
This is where your exit strategy comes into play. Exit strategy is something that I talk about a lot because it is crucially important to helping you secure finance for your deals. Ultimately, your exit strategy is the thing that will let the bank know how they will get paid. So if you don’t have a strong, secure exit strategy that is justified with due diligence and with testimony to surround it then the chances of finance are greatly reduced because if I was going to lend you £5 today I would want to know with certainty when you would be able to pay it back and this works exactly the same for the banks. So, don’t walk into a bank without having a good plan about exit strategy.
You need to ensure that you mitigate the essential risks...
- Mitigate planning risks by making sure you have a good architect
- Mitigate development risks by making sure that you have a good team of builders and contractors
- Mitigate exit risks
Buy to let
If you are looking at buying to let, the bank will want to stress test the rental income vs the mortgage costs. This will be one of the key things when you are in the financial space. Generally speaking, banks look now for 140% of rental income to cover the mortgage. For example, if you have a property that costs £1000 per month in mortgage costs. They will be looking to make sure that the rental income is a minimum of £1400 per month. So that is 140% of the mortgage cost. This is what a stress test is, so you need to pre armed with all of this information before you go into your bank meeting. You will be able to let them know what your rental income will be and what your mortgage cost will be.
Another top tip for when you go into the bank to get lending is have a basic knowledge of finance and know your numbers. Don’t give the bank the opportunity to ask you questions that you don’t have the answer to. You need to make sure that you are prepared and know your deal inside out by the time you have done your research and due diligence. If it does come to it and for some reason you don’t know the answer to one of their questions do not guess. Be honest and say that you will go back to them with the answer as soon as you have got it.
The most important thing to think about when you are talking to financers or working with others is to be armed with well-presented documentation that shows who you are. It may be that you don’t even use the documents that you give to the bank manager, but if you go in with organised documentation then you will feel confident about why you are sat there. Within this documentation you should have your business plan demonstrating exactly how the deal will work. If you go into your meeting with the assessments and due diligence that you have done, you will feel a lot more confident.
The final thing that I think is important to mention is that you need to prepared to fail. You need to be prepared to fail because it doesn’t matter. Whatever the outcome is that you get from the bank are just that. They are outcomes. It really doesn’t matter what those outcomes are. If they are negative it gives you the opportunity to start asking questions such as why you didn’t manage to secure lending in that instance. Because it may just be that you actually went to the wrong bank that had the wrong strategy. It could have been that you just didn’t tick some of that bank’s particular boxes. If you did fail, you need to look at this as a learning experience.
- Developments need to make at least 17.5% to be finically viable
- Buy to let properties must be stress tested at a minimum of 1.25% but realistically 1.4% in the current market.
- Make sure that you know all of your numbers, taking all of your costs into account
- Ensure that you have all of the CV’s of the people that you are working with