The benefits of a drawdown facility for developers

Jonathan Rubins, Director at Alternative Bridging Corporation looks at drawdown facilities. What they are and how they can benefit property developers in particular.

Related topics:  Finance,  Property,  developers
Jonathan Rubins | Alternative Bridging Corporation
6th November 2023
Jonathan Rubins 692
"For businesses, especially those grappling with the ebbs and flows of income and expenses, a drawdown facility can be a game-changer"
- Jonathan Rubins - Alternative Bridging Corporation

There are many options to meet the financing needs of businesses and property investors in the specialist lending market, but one of the least well-known yet extremely useful tools is the drawdown facility.

At its core, a drawdown facility is an arrangement that offers borrowers a pre-agreed limit of funds that they can access over a specific period. Unlike traditional loans where the lender disburses the entire sum upfront, a drawdown facility permits borrowers to access the funds as and when they need them, much like a credit card. The central appeal of this mechanism lies in its potential to save on interest costs, as typically, interest accrues only on the amount actually drawn, not the entire pre-agreed limit.

Benefits for property investors

Property investors, often having to manage a range of unpredictable expenses like property maintenance, sudden renovations, or unplanned repairs, can find the drawdown facility particularly beneficial. The flexibility it offers means they can tap into the funds just when required, rather than having a large loan looming over them from the outset.

Additionally, this facility can lead to significant interest savings. Since interest generally accrues only on the drawn amount, property investors can potentially enjoy reduced costs compared to a traditional loan. Those with multiple properties under their portfolio can effectively juggle expenses across various sites using just one drawdown facility. It's also a handy tool for those seeking bridging finance — where an investor requires short-term funding while waiting for more permanent financing or in the process of offloading another property.

Advantages for business owners

For businesses, especially those grappling with the ebbs and flows of income and expenses, a drawdown facility can be a game-changer. Cash flow can be managed much more effectively as drawdown offers a cushion for working capital requirements, addressing mismatches between incoming revenues and outgoing expenditures. Businesses that see seasonal income variations can lean on the facility to cover costs during less prosperous times, ensuring smooth operations year-round.

Furthermore, businesses on a growth path can utilise the drawdown facility to fuel their expansion. Be it launching new marketing campaigns, acquiring new equipment, or expanding into fresh territories, having this flexible funding source can prove invaluable. In essence, it also doubles up as a safety net, providing a buffer for unforeseen expenses or sudden opportunities that businesses might not want to pass up.

At Alternative Bridging Corporation, we offer a drawdown facility called the Alternative Overdraft. Loans are from £250,000 to £2m over a two-year period and are best secured by first charge on under-utilised property assets or by first charge over commercial or residential and second charge over residential properties.

For example, a London property development was recently completed using the Alternative Overdraft. It was secured on a property owned by the client worth £1.67m. The property contained three flats, all of which were let out on ASTs.

The client used the security to raise a £344k facility to complete work on another project which was nearly complete but, due to increased costs during the pandemic, the client required funds to complete the property development quickly and wanted the flexibility to draw down on the facility when they had invoices to pay.

With the Alternative Overdraft, the client was able to draw funds as and when they were required to complete the property development. And, by lending against the investment flats the client already owned, rather than the development site for which the funds were being used, a lot of time on legal work and due diligence was saved.

The drawdown facility is a great tool for property investors and business owners, but not that many specialist lenders offer it. It can mean the difference between seizing an opportunity and missing it or seeing a business succeed instead of struggling because of cash flow.

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