Banks and finance companies each have advantages and disadvantages when it comes to construction and development lending. The right arrangement often needs to be tailored to the project itself.
How do you choose? First, understand how banks and finance companies differ in their project requirements:
Bank requirements for construction and development loans (relatively low interest rates)
- Developer credentials: Requirements vary with project size. For medium and large projects, developers need a relatively extensive track record, and the project itself must meet certain return requirements.
- Presale requirements: Developers must meet the bank's presale requirements for the project at the outset.
- Building contractor requirements: Beyond assessing the developer's credentials, banks also impose requirements on the building contractor, depending on the project and its funding needs. If the developer is also the building contractor, the bank's assessment will be more stringent.
- How funds are advanced: Banks generally advance funds on a cost-to-complete basis, so developers must provide all the upfront funding themselves: the difference between the total cost and the loan amount. Each drawdown must also be supported by a valuer's and/or quantity surveyor's report.
- QS Banks generally have their own lists of approved quantity surveying firms from which clients can choose. These are mostly large firms with relatively demanding requirements. (QS stands for Quantity Surveyor, someone who, in simple terms, prepares cost estimates and final cost accounts for a project.)
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Finance company requirements for construction and development loans (relatively high interest rates)
- Developer credentials: Finance companies focus more on the project's prospects and the value of the security, with relatively less emphasis on the applicant developer's experience and background.
- Presale requirements: Lending criteria are relatively flexible, with no presale requirements, allowing developers to decide when to sell.
- Building contractor requirements: Requirements for building contractors are less stringent than those imposed by banks, and the developer can also be the building contractor.
- How funds are advanced: Most finance companies can lend separately for land and construction, meaning a loan can be obtained at the land purchase stage. Construction loan drawdowns are also more flexible, with most requiring only council inspection sign-offs.
- QS requirements: Most finance companies do not require a QS for small and medium development projects. For large projects, this can be discussed according to the developer's requirements. Documentation requirements for drawdown assessments are also relatively light.
Reasons to choose a finance company
The comparison shows that most Chinese builders who prefer finance company loans despite their higher interest rates do so mainly for the following reasons:
- Presales: Meeting a bank's presale requirements takes time, while selling homes before completion generally yields lower profits than selling completed homes;
- QS：Adds costs and can delay construction because of disagreements over cost estimates. In some cases, this can even cause funding to break down.
- Time costs: Finance companies have relatively simple, quick lending requirements and processes, which can shorten project development times.
- Full-contract arrangements (building contractor requirements): Increase costs.
- Start-up capital: Banks require clients to contribute all upfront costs, so their start-up capital requirements are higher.
Ultimately, neither banks nor finance companies are inherently better. The aim is to tailor the arrangement and find a more suitable offer for the client. Our recommendation is:
Finance companies may be better suited to less experienced small and medium builders constructing 3–10 homes at a time. They can offer clients more support, higher LVRs and more relaxed presale and QS requirements. This can help these builders develop a solid track record over several years, preparing them to become bank clients in the future.
About the expert
York Zhang (Zhang Yong)
Chairman of Huarong Finance
In 2006, York Zhang (Zhang Yong) founded Huarong Finance to provide the Chinese community with loans for homes, construction, business, land development, vehicles and heavy equipment. Combining his mortgage broking expertise with his personal experience of living in New Zealand, York Zhang hopes to use Huarong Finance to introduce more products suited to the Chinese community's needs and circumstances, develop more outstanding mortgage brokers, and release more capital from clients' assets for reinvestment.