How does development finance work and what are the criteria? Below Gary Hemming at ABC Finance explains the ins and outs of project financing and development loans in the property sector and beyond.

1. What is development finance?

Development finance is a type of short-term, secured finance which is used to fund the conversion, development or heavy refurbishment of property or properties. Property development finance can be used for a range of different building projects but tend to be used for ‘heavier’ projects, which require serious building works.

Projects which require ‘lighter’ works, such as internal refurbishment are likely to be better suited to a bridging loan.

2. How does it work?

Development finance can be more complex than residential mortgages, with funds advanced upfront and then throughout the build.

Funds are initially advanced against the value of the site, with most lenders happy to advance up to 60-65% of the value.

Once the build has begun, further funds are released at agreed intervals, with lenders often willing to advance up to 100% of the build costs. In order to agree to each stage release payment, the site will be re-inspected by either a lender representative or monitoring surveyor. If they feel that works are being done to a high standard and there is sufficient value in the site to release the next stage, funds will generally be released quickly.

The reinspection and further staged drawdown are then repeated until the project is completed.

3. How is the interest paid?

The interest is retained by the lender as each stage is drawn down, meaning there are no monthly payments to make. When the development is complete, the loan is redeemed along with any interest that has accrued.

This generally suits both the borrower and lender as cash flow can be difficult to mage during a build. As such, the removal of monthly payments makes the loan easier to manage for all parties.

4. How much does it cost?

The rate charged will depend on several factors, with the main ones being

• The developer's experience and track record
• The scheme being undertaken
• The location of the development
• The amount of funding required
• The loan to value/loan to GDV requested

Larger loans of say £500,000 or above will usually be between 4-9% per annum depending on the above factors.

Smaller loans of say below £500,000 will usually range from 9-12% per annum however if the deal is strong you could pay around 6.5% per annum. Usually, lenders price each application individually.

In addition to the interest charged, the will usually be a number of other fees, the main ones are:

• Lender arrangement fee – this is usually 1-2% of the loan amount
• Lender exit fee – this is not always charged but can be 1-2% of the loan amount.
• Valuation & monitoring surveyor fees – these can vary and it is almost impossible to offer a guide due to the number of variables.
• Broker fees – most brokers will expect to earn 1% for arranging a property development loan. Where they are not paid by the lender, they will usually charge it as a broker fee directly to you.

5. Understanding the maximum loan available

Property development finance lenders use a number of key metrics to calculate the maximum loan, they are:

• Loan to value (LTV) – The loan to value ratio is used to calculate the maximum available advance at any one time. The monitoring surveyor will revalue the site throughout the build to ensure the lender is never overexposed.
• Loan to cost (LTC) – Most lenders will want to know that you are putting up a certain amount of the money yourself, loan to cost is used to calculate this. For example, a maximum loan to cost of 90% would mean that the lender is not willing to put more than 90% of the total cost of works into the scheme. You would, therefore, have to pay at least 10% of the total project cost by way of deposit.
• Loan to gross development value – Otherwise known as loan to GDV, is the maximum percentage of the loan that the lender is willing to offer. If a £1,000,000 scheme had a maximum loan to GDV of 70%, the maximum total facility would be £700,000.

The lender will combine all 3 of these metrics to calculate the maximum loan. Where there is a conflict between the 3 figures, the lower of the 3 will be chosen to cap the loan.

6. What happens when construction works are complete?

When the works are complete, the loan will generally need to be repaid. Often, people look to refinance to a term loan such as a mortgage or switch to a development exit product whilst the site is sold as this can be cheaper than the development finance, maximising profit.

The facility will be set up to last for only the build period, with a grace period to allow time to refinance or sell. Development finance should never be used as a long-term finance solution.

Multi-currency payments provider FairFX has revealed that since the Brexit referendum, the Euro has decreased 13% against the pound increasing financial pressure on businesses who operate cross border.

Uncertainty over future trade agreements alongside fluctuating currency rates have put the spotlight on the cost of doing business internationally and highlights the importance of monitoring foreign currency transactions.

An estimated 17% of UK based SMEs are doing business internationally, boosting their own bottom line, as well as the UK economy.  Whilst international expansion offers access to new markets, ambitions for growth need to be well planned financially, starting with the basics.

35% of SMEs state cashflow is a barrier to growth, making smart currency moves essential when it comes to international payments, and by getting the best value for every international transaction, both business ambition and cashflow can be supported.

FairFX Top tips for getting the best value when making international payments:

1. Know what you want

To get the best international payment provider for your business you need to know what you want. Consider how regularly you’ll be sending and receiving money overseas, how many currencies you’ll need to transact in and understand the costs associated with making both singular and regular transactions.

Fees and charges can vary by transaction type, day, time and speed you require the transaction to be completed in, so list out the different transaction types you may want to make and understand how the fees and charges can vary so you don’t get caught out. Understand how currency rates are set and how they compare to other providers. This can be confusing to unpick so speak to a currency expert if necessary.

2. Review your current payment package

High street banks don’t offer the best value when it comes to international business payments. Using your current banking provider to handle international as well as domestic transactions may be convenient but defaulting to them might mean you’re missing out on better rates and lower fees.

As your business grows and develops, your business banking needs will also evolve and if you’re transacting regularly small charges can add up, meaning you could be paying a high price for an unsuitable service. 

3. Select a transparent, convenient and consistent service

If you’re regularly buying from and selling abroad, fees could soon take a portion of profit from your bottom line. Pick a provider whose fees are transparent and made clear upfront so you can better manage your expenses. Look for a service where rates are consistently good – don’t be lured with teaser offers that expire and leave you trapped or unaware of post introductory fees and charges.

4. Understand the market you’re operating in

Keeping track of currency movements can be easier said than done, so sign up for a reliable rate watch service, like the one provided by FairFX which alerts you when currencies you operate in have moved in your favour. This way you can make international payments when rates give you a commercial advantage.

5. Maintain your standards

The rigorous standards you set for expenses and payments at home don’t stop when your employees pass border control, so find a solution where you are confident in who is spending what. Consider prepaid corporate cards which allow you to transact with competitive exchange rates and top-up in real-time, giving your staff the funds they need to travel for work, providing peace of mind and control over expenditure on a global scale.

6. Watch the way your employees pay

When it comes to travel, regardless of whether your staff are hosting meetings or need to cover the cost of their own accommodation and essentials, make sure you’re in charge of the exchange rate they are using for their payments.

If staff are currently paying their own expenses and then claiming back, make sure they don't fall into any exchange rate traps. Advise them to always pay in the local currency when travelling and avoid exchanging at the airport.

The FairFX corporate prepaid card allows staff to pay for expenses with the amount of money you have approved them to spend, whilst you can track and report on spending on the integrated online platform, so there is no reliance on employees using their own payment methods, choosing the exchange rate and fees charged and reclaiming the cost from your business.

7. Benefit from the best rates

Exchange rates fluctuate from day to day with the euro currently 13% lower than before the Brexit referendum announcement, a sum that on a large transfer could make the difference between profit and loss. Consider a forward contract to ensure you can benefit from peak rates by fixing international transactions up to a year in advance.

8. Ask an expert

If you are regularly making international payments it is worth finding an expert to help you with services not offered by your bank to help minimise risk and maximise the return of doing business overseas.

9. Set up a stop loss or limit order

Protect your business against market downturns with the aid of a Stop Loss, which will ensure any losses are limited if you’re aiming for a higher rate and the market takes a turn.

Also consider a Limit Order where you set up ‘target’ exchange rates and ask your currency dealer to process the transaction when the rate you’ve set is achieved to give you certainty over how payments will affect your bottom line.

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Ian Stafford-Taylor, CEO of FairFX said: “Easy access to international currency at market-leading rates whether travelling abroad or sending and receiving payments is vital for businesses breaking into and operating successfully internationally, especially in a market where rates are constantly fluctuating.

“Many small and medium sized businesses settle for high street bank accounts which can charge extortionate fees for international transactions and offer poor service. The right account and sensible planning could add up to big savings, something that SMEs can ill afford to waste in a competitive marketplace.

“As future trade agreements post Brexit become clearer businesses could find themselves with heavy workloads as they adjust the way they operate, so finding a trusted payment provider and reaping every possible benefit when it comes to currency will continue to be crucial for success.”

(Source: FairFX)

When adopting new payment methodologies, banks must strike a challenging balance between ease of use and access and the need to put in place stringent levels of security. With technology evolving at ever-increasing rates, it’s increasingly difficult to keep on top of that challenge. Below Finance Monthly hears from Russell Bennett, chief technology officer at Fraedom, on this challenging balance.

Banks first need to put in place an expert team with the time, resource and capability to stay ahead of the technological curve. This includes reviewing, and, where relevant, leveraging the security used on other systems and devices that support access into banking systems. Such a team will, for example, need to look at the latest apps and smartphone devices, where fingerprint authentication is now the norm and rapidly giving way to the latest facial recognition functionality.

Indeed, it is likely that future authentication techniques used on state-of-the-art mobile devices will drive ease-of-use further, again without compromising security, while individual apps are increasingly able to make seamless use of that main device functionality.

This opens up great potential for banks to start working closely with software companies to develop their own capabilities that leverage these types of security checks. If they focus on a partnership-driven approach, banks will be better able to make active use of biometric and multifactor authentication controls, effectively provided by the leading consumer technology companies that are investing billions in latest, greatest smartphones.

Opportunities for Corporate Cards

This struggle to find a balance between security and convenience is however, not just about how the banks interact directly with their retail customers. We are witnessing it increasingly impacting the wider banking ecosystem, including across the commercial banking sector. The ability for business users to strike a better balance between convenience and security in the way they use bank-provided corporate cards is a case in point.

We have already seen that consumer payment methods using biometric authentication are becoming increasingly mainstream – and that provides an opportunity for banks. Extending this functionality into the corporate card arena has the potential to make the commercial payments process more seamless and secure. Mobile wallets, sometime known as e-wallets, that defer to the individual’s personal attributes to make secure payments on these cards, whether authenticated by phone or by selfie, offer one route forward. There are still challenges ahead before the above becomes a commercial reality though.

First, these wallets currently relate largely to in-person, point of sale payments. For larger, corporate card use cases such as settling invoices in the thousands, the most common medium remains online or over the phone.

Second, there are issues around tethering the card both to the employee’s phone and the employee. The 2016 Gartner Personal Technologies Study, which polled 9,592 respondents in the US, the UK and Australia revealed that most smartphones used in the workplace were personally owned devices. Only 23 percent of employees surveyed were given corporate-issued smartphones.

Yet the benefits of e-wallet-based cards in terms of convenience and speed and ease of use, and the potential that they give the businesses offering them to establish competitive edge are such that they have great future potential.

One approach is to build a bridge to the fully e-wallet based card: a hybrid solution that serves to meet a current market need and effectively paves the way for these kinds of cards to become ubiquitous. There are grounds for optimism here with innovations continuing to emerge bringing us closer to the elusive convenience/security balance. MasterCard has been trialling a convenient yet secure alternative to the biometric phone option. From 2018, it expects to be able to issue standard-sized credit cards with the thumbprint scanner embedded in the card itself. The card, being thus separated from the user’s personal equipment, can remain in the business domain. There is also the opportunity to scan several fingerprints to the same card so businesses don’t need to issue multiple cards.

Of course, part of value of bringing cards into the wallet environment is ultimately the ability to replace plastic with virtual cards. The e-wallet is both a natural step away from physical plastic and another example of the delicate balancing act between consumerisation of technology and security impacting banking and the commercial payments sector today. There are clearly challenges ahead both for banks and their commercial customers in striking the right balance but with technology continuing to advance, e-wallets being a case in point, and the financial sector showing a growing focus on these areas, we are getting ever closer to equilibrium.

Here Laura Hutton, Executive Director at Quantexa, explains the money laundering phenomenon, describing the typical profile of a money laundering ring, the added variety some display, and the challenges banking systems currently face in identifying money laundering systems.

Global money laundering transactions are currently estimated at 2 to 5% of global GDP, or up to US$2 trillion, funding crimes such as terrorism, corruption, tax evasion, drug and human trafficking. By 2020, experts predict that there will be more than 50 billion connected devices across the world. This is a cause for concern for banks and financial institutions alike, as criminals will be attracted to fresh ways to communicate and partake in criminal activity.

Shockingly, over 25% of financial services firms have not conducted AML/CFT risk assessments across their global footprint (PWC) – so it is no surprise that criminals are still finding loop holes. However, according to Wealth Insight, global AML spending is predicted to rise from US$5.9 billion in 2013 to US$8.2 billion in 2017 – promising a stronger barrier to money laundering activities. In part, this has been driven by the increasingly strict regulatory landscape and some eyewatering fines, but organisations are also keen to tackle the problem for both moral and reputational reasons.

The profile of a money laundering ring

The vast majority of money laundering is committed by organised criminal gangs and involves a complex web of individuals, businesses, domestic payments, overseas wires and increasingly trades and settlements. These gangs will need many low-level individuals who deposit cash into the banking system, typically in low volumes to avoid detection. The gangs will then need to move the aggregated funds around in larger volumes and overseas. This is a complex structure and designed to avoid raising suspicion.

One size doesn’t fit all

All banks will have AML systems in place, but this doesn’t mean they are correctly suited. At first, financial institutions put in place systems to detect money laundering within their retail book, looking for simple patterns like large cash deposits in short time periods or transactions which are unexpectedly large for a standard domestic customer. This may flag some of the low-level criminals, but the modern organised criminal is choosing to hide the activity elsewhere, for example, cash-heavy businesses and financial markets where the transaction volumes are significantly bigger and where overseas transactions are the norm.

Banks and regulators realised that these non-retail products had money laundering risk, but no tailored AML systems existed for these complex products. As a result, many organisations have simply repurposed existing retail and market abuse systems that inevitably aren’t suited to the product line that they are trying to protect. A pre-configured AML system for retail banking will focus on finding individual high-risk transactions without the context of corporate structures, geographical money flows and the complex behaviour of that product type. Consequently, these systems are less able to identity suspicious behaviour and do not effectively prevent money laundering.

Time for a new approach

To address the more pressing money laundering risks, and greatly reduce their vulnerability, banks need to take a different approach that can interpret and risk assess these complex webs of activity and present them assembled and ready for investigation. Money launderers are not transactions, they are individuals, and they need to be modelled as such.

The contextual monitoring approach uses entity and network analysis techniques, in combination with advanced analytical methods to uncover the hidden web of criminal activity and highlight these holistically as an aggregated view of risk across multiple products and data sources.

This eliminates the vast number of alerts generated at the transactional level and focusses the attention on the high-risk people, businesses and networks that underpin these criminal gangs.

Money laundering remains a great issue for banks and financial institutions alike. As the criminals get smarter, current AML systems are falling behind. To beat the criminals at their own game, banks must adopt new compliance technologies to make constructive use of the infinite data accessible, join the dots in their customer network, and then become more efficient when acting against illegal money laundering activity.

Another financial year has passed, and as you look back, will you seek to do things differently next time around? Below, Dean Snappey, the President and Co-Founder of DocsCorp discusses with Finance Monthly 5 simple accounting tools that’ll make your life that much easier to navigate at this time of year.

Over the past 12 months we have seen considerable adjustments to taxation, such as changes to dividend taxation and the recent increased tax for landlords. Aim to prevent the end of year mess and avoid the kind of errors that carry implications to your and your company’s reputation.

There are several accounting tools and software solutions available at your fingertips to ease the process, stay organised and plan ahead. Make the most of these accounting tools and follow these five easy steps to make pre-emptive tax planning simple.

1. Bundle Documents. Best practice is to ensure any invoices, statements and paperwork are scanned and saved as a PDF document as paper filing systems and loose documents are at risk of being lost or damaged. Document bundling software gives you the ability to collate PDF content and bind all relevant documents such as tax returns, invoices and financial accounts into a single file for each client. By bundling all important documentation, it will make the process of finalising paperwork much easier as all documentation required will be stored together. Finalised documents can then be sent as a single secure file in one hit rather than multiple attachments, saving you time with each client and avoiding the risk of lost or separated files.
2. Redaction. As part of the process of preparing documents with such complex data, it is essential to redact classified or sensitive information. To redact is to remove, therefore ‘redacted’ is often used to describe documents from which sensitive information has been expunged. By using a redaction tool it is easy to search whole documents to redact multiple instances of a word or string of words in a way that is quick, easy and fail-proof. Redact personal information or bank account details in documents as part of an audit.
3. Make Scanned Documents Searchable. When you scan invoices, receipts and finalised paperwork onto your desktop, the scanned documents are image documents that do not have the text layer that’s needed to make them searchable. You can make the documents text-searchable with an Optical Character Recognition (OCR) tool. This software converts scanned, printed or handwritten files into its machine readable text format.  You can then search whole documents for a word, phrases or a set of numbers which makes finding information or documents for tax audits a breeze.
4. Remove Metadata. Metadata may appear hidden, however, every time you annotate, edit or alter a document, your decision is stored invisibly within the very document you’re working on. Metadata removal software removes metadata from files – eliminating any risk of unintentional information leakage. To put it simply, the metadata cleaner will ensure you only send the part of the document or spreadsheet you intend to – exactly what would be printed out on a piece of paper. Remove hidden cells and other sensitive metadata before uploading or attaching files intended to be sent to clients.
5. Compare Documents for Change. Working with numerous clients means navigating through each client’s financial accounts and complex paperwork. Throughout the year many changes can occur within clients’ businesses, often meaning multiple changes to important documentation. Analysing large volumes of documentation, in which precision is required, can be very time consuming. There is a simpler way to undertake this task, which is by using a Comparison software package. This enables you to compare and analyse the differences between two documents with incredible accuracy and reliability. The software is able to show you the smallest change in documents, spreadsheets, PDFs without needing to convert them first. Save time and never miss an important change again.