Property developers are increasingly turning to crowdfunding strategies as they find it more and more difficult to access traditional sources of finance. This is especially true of investors based outside of London and other major cities.

With loan-based crowdfunding, the company borrows money from a large number of investors, and then makes regular interest payments to these investors.

Funding property companies in this way means that investors can invest in buy-to-let, commercial and other properties without actually buying the property – instead they may lend as little as £100 to the developer via the crowdfunding scheme.

Developers who make use of loan-based crowdfunding (also known as peer-to-peer (P2P) lending) need to be aware that they are in effect borrowing money from the investors, and that they need to make monthly interest repayments to these investors, which could potentially have an impact on cash flow. However, there are no significant legal costs associated with borrowing in this way.

Investors need to be aware that the arrangement involves them lending money to the company, and that they are likely to lose their money if the property company fails. Whilst the returns available via interest payments on P2P agreements can appear attractive, this type of transaction cannot in any way be compared to a savings account.

The largest P2P property investment to date in the UK is the £10.8 million lent to development company Kersfield by Wellesley & Co., the country’s fastest growing P2P lending firm. Kevin McCloud, the presenter of TV programme Grand Designs, received £1.9 million in funding for his company via Crowdcube.

Some property companies have turned to mini-bonds as a way of funding their activities. In some ways these are similar to P2P investments in that individuals lend often fairly small sums of money to companies, and receive regular interest payments over the term of the bond, which may be three to five years. Here there is no P2P lending platform acting as middleman though. Although mini-bonds can allow the company to roll interest up, there is also a fixed and floating charge payable by the company, and a potentially significant cost in establishing the bond. The risks to investors are similar to those involved with P2P lending, i.e. investors are likely to lose their money if the company they lend to fails, and there is no recourse to the Financial Services Compensation Scheme.

Developers can also attempt to obtain funding via equity investment, and many venture capital companies are active in the property sector. However, this form of investment means giving a shareholding to the investor, and maybe a requirement to offer them a position on the board of directors.

Some companies have instead opted for the halfway house that is mezzanine finance. The mezzanine finance provider is still lending money to the company, but also takes some form of equity stake.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.