Borrowing vs. Joint Venture: What’s The Best Financing Option For Property Developers?

Property developers often face a critical decision when funding projects: should they borrow money, use joint venture, or a combination of both? Each option has distinct advantages and drawbacks, and the best choice depends on the project’s scale, risk profile, and the developer’s long-term goals. This blog compares borrowing and joint venture, their pros and cons, and real-world situations.

Understanding the concept of borrowing money

This typically involves borrowing money from lenders, such as banks or specialist bridging finance providers, with the agreement to repay the principal plus interest over time. Common forms include bridging loans, development finance, and traditional mortgages.

Pros of borrowing money

• Retain full ownership: Unlike joint venture, borrowing does not dilute your stake in the project.
• Tax benefits: Interest payments on loans are often tax-deductible, reducing overall costs.
• Predictable repayments: Fixed repayment schedules help with budgeting and cash flow management.
• Additional potential: Borrowing allows developers to take on larger projects without committing personal capital.

Cons of borrowing money

• Repayment obligations: Missed payments can lead to penalties or even repossession.
• Credit requirements: Strong credit history and collateral/security is usually required.
• Interest costs: High interest rates, especially with short-term loans, can erode profits.

Understanding joint ventures

Joint venture finance involves raising capital by selling a share of the development project. This could be through joint ventures, private investments, or crowd-funding platforms.

Pros of joint ventures

• Less repayment pressure: Unlike loans, equity investors share the risk and only profit if the project succeeds.
• Access to expertise: Investors may bring industry knowledge or valuable connections.
• Flexibility: No fixed repayment schedule, which can ease cash flow concerns.

Cons of joint ventures

• Loss of ownership and control: Investors may demand a say in decision-making.
• Profit sharing: A portion of profits will be distributed to stakeholders.
• Complex agreements: Structuring equity deals can be time-consuming and legally intricate.

When to borrow from a lender

Borrowing is often preferable when:

• Interest rates are low, making borrowing more cost-effective.
• The project has a high certainty of success, likelihood of success, and the ability to meet loan repayments.
• You receive all profits and run the project without partner interference.

Case study: Small-scale residential refurbishment

A developer acquires a run-down property in Manchester with a clear refurbishment plan and a strong exit strategy (selling at market value). A bridging loan helps to cover the purchase and refurbishment costs which are repaid upon sale. Since the profit margin is deemed to be predictable, borrowing in this way makes sense without sacrificing equity.

When to choose joint venture financing

This may be better when:

• The project is more high-risk, such as a large commercial development with uncertain demand.
• The developer lacks sufficient capital or credit history to secure a loan themselves.
• Strategic partnerships could enhance the project’s success.

Case study: Large mixed-use development

A developer plans a £20m mixed-use scheme but is unable to raise a traditional loan. The developer partners with an investor who provides 40% equity funding. The investor shares the risk and provides industry expertise, making the project much more viable despite market uncertainties.

Hybrid approaches

Many developers use a blend of borrowing and equity to balance risk and reward. For example, a developer might secure a 50% borrowing and raise the other 50% through equity or mezzanine funding.

Conclusion

Whether borrowing or joint venture is better for property developers is not universally applicable. Borrowing is ideal for those with strong credit and predictable projects, while equity suits riskier ventures or those needing strategic partnerships. Assessing your project’s scale, risk, and long-term goals will help determine the best financing route.

At bridgingloans.co.uk, we specialise in flexible borrowing solutions for property developers. If you’re considering your financing options, get in touch to explore how a bridging or development loan could support your next project.