Revolving Credit Facilities are a continual line of credit arranged between borrower and lender, where the borrower can access funds as and when needed, rather than drawing down on the entire loan from day one. Here, we look at the three approaches to arranging a Revolving Credit Facility (RCF).
How Revolving Credit Facilities Work
As well as accessing funds on an as-needed basis, Revolving Credit Facilities, can also be repaid when convenient to the borrower (within the parameters of the loan agreement).
They are typically used by property investors and developers who seek to gain prior approval of funding ahead of envisaged purchases.
There are three approaches to arranging a Revolving Credit Facility (RCF);
A forward fund RCF
The first approach is where a credit framework is agreed. The lender might offer approval in principle to lend £xxx against each new acquisition, subject to meeting certain conditions.
This would typically be a minimum LTGDV, LTC, day-one leverage, minimum client equity and property type, as well as other criteria, such as geography and planned works.
An existing stock RCF
The second approach is where an RCF is secured against existing stock, either as first charge or a 2nd charge. This is handy for developers and investors that are equity rich and want to raise money quickly.
A combination of both
The third approach is a combination of both existing stock and forward-funded Revolving Credit Facilities.
The biggest advantage here is that it can mean a ‘cashless’ deal for the borrower.
As an example, the lender could take a charge over an existing BTL or commercial property portfolio assets owned by the borrower, effectively creating the deposit for the new asset, which the lender also takes a charge over. Providing there is enough equity in the properties already owned, then you can fund a property purchase with no cash.
However, it essentially means that all your eggs are in one basket, so if one project goes wrong the lender can stop funding across all assets.
In other words, the lender has all the power.
Why are Revolving Credit Facilities useful?
This type of structured debt is particularly useful for borrowers who are unsure of their precise financial needs per project or who need to buy or invest into the development in stages, and/or wish to be super-efficient with their equity in existing assets.
Instead of arranging a mortgage on an asset and then drawing it all in one go and paying interest on the full balance (as well as having the cash burning a hole in your pocket), an RCF means the borrower will only pay debt on the funds they actually use. This can result in significant savings - to see an example of how it might work, read our blog on Peak Debt Facilities.
RCFs offer a different approach to traditional development finance, and they allow property developers to recycle their equity during the course of the project, which can decrease the amount of finance required and the cost of borrowing.
With current labour market shortages causing delays to construction and a slower sales market, funding a scheme with a Revolving Credit Facility can offer reassuring flexibility.
Good to know
All types of RCFs are bespoke arrangements and take time and effort for a lender to set up, so the lender will want you to deploy a good percentage of the total facility and quickly. This also means that, in order to be a worthwhile arrangement for the lender, the minimum viable loan size is typically about £ 10m, but could be as low as £ 5m.
One of our broker partners, Property Finance Group, recently arranged a £ 50m, 4-year facility for a developer. If you're looking for more information on Revolving Credit Facilities or Commercial Real Estate finance more generally, for yourself or your clients, please get in touch - info@brickflow.com.
Brickflow is a software company only. Our product is designed to be used by experienced property finance professionals to source and apply for development finance and bridging loans.
Property investors can search the finance market by using our software to model and analyse their deals, but they cannot apply for finance through Brickflow without a Broker. Speak to your Broker about Brickflow or ask us to connect you with a Broker.
Property development carries risk, including variables beyond the developer’s control. A property development loan is debt and should be procured with caution.
Brickflow does not provide information on personal mortgages, but your home and other assets are at risk if you provide a personal guarantee for a corporate loan.
The inside track on property development in September 2022. Covers interest rate rises, lender reactions, build costs and land price predictions.
The inside track on property development in September 2023.
Brickflow wins Technical Innovation of the Year at the NACFB Commercial Lender Awards 2023