Change funding landscape for SME developers, says finance specialist

Lenders and the government need to change the funding landscape for smaller housing schemes, says a leading provider of specialist finance to SME developers.

David Norman, a director of mezzanine lender Davon, says action is urgently needed as smaller developers across the UK face crippling supply chain issues causing delays and cancellations of residential projects.

Already squeezed by planning delays and rising costs, developers now find themselves trapped between suppliers wanting upfront payments and lenders unwilling to hand over cash for them.

Mr Norman wants to see the finance industry more open to so-called offsite payments and thinks the government should consider a scheme to back lending for some kinds of materials.

He says: “We understand that banks and other senior lenders want to see materials safely delivered to site before releasing funds, but we have to recognise that the industry has changed with many more suppliers requiring to be paid in advance of shipping materials.”

He adds: “Holes are opening up in the funding stack. We need to be more open to the challenges of offsite payments and cashflow shortages in general and find a way to adapt.”

Mr Norman points out that building regulations and the drive to net zero are leading to more system builds using big-ticket materials such as timber frames and prefab components. That means developers need more cash to pay for materials upfront.

“The building industry is being expected to change to meet carbon targets, so we need a government-backed system for financing materials that contribute to that goal,” says Mr Norman.

He adds: “I think there is a particularly strong case for making such a scheme available to SME residential developers who are building new homes in a housing shortage but do not have the deep pockets of the big housebuilders.”

Davon reports growing demand for mezzanine finance – second tier lending to back up primary bank loans – as SME developers try to plug holes in the funding for projects. It allows them to adapt to cost increases and time delays without having to plough more of their own capital into projects.