Securing the Site
The lender will usually release a set amount upfront to allow the purchase to be completed. This is usually around 65-70% of the current value of the site. From this figure, any interest and charges are deducted, leaving you with the net loan.
Payments are usually released at agreed stages in the build to allow work to continue, once the current work is signed off. Sign off is managed by a monitoring surveyor, who is instructed by the lender to ensure the development is on track.
The checks generally include considering the work completed, both in terms of progress made to the previously agreed build schedule, along with the quality of the work and cost management.
If there are discrepancies in the work completed, compared to the plan agreed, stage payments can be delayed. The aim is always to ensure the stage payment is there on time and that construction is never interrupted due to a delay in receiving funds.
Cash Flow Management
Cash flow is vitally important in managing a development project. There is a tendency to look at the initial deposit needed to purchase the site and whether the loan meets your needs. Keeping cash flowing throughout the build is vitally important. Ensure that your project follows a schedule of works, backed up with a cash flow forecast to project everything as closely as possible as this will help greatly.
By following this advice, you will be able to judge exactly when cash will be needed into the site. This prevents problems further down the line and is far more useful in the real world than relying on a draw down schedule set out by the lender.
Accuracy of Build Schedule and Costings
The accuracy of build schedule and costings is vital to projecting cash flow. Where funds are tight for a project, this becomes even more important. Although lenders will be happy to release equal amounts monthly, some months will be particularly expensive. As a result, building can sometimes halt as funds are being waited on.
The flip side to this is that in months where you will be spending less, funds will be drawn down that aren’t required. This can be just as big a problem, as drawing down too much money, too quickly will result in more interest being paid, reducing the profitability of the project.