If you’re wondering whether a development loan could be what you need to help your project along then read on for our helpful guide…
What is development finance?
It’s a loan granted for the development or refurbishment of residential, commercial or mixed use properties.
Development finance is often granted to experienced builders and developers so that they can raise the capital to turn their building ideas into a commercial reality. Specialist development finance lenders will take the future value of the property into consideration when agreeing a loan.
How does development finance work?
Unlike a traditional mortgage lender that will consider the value of the property, a development finance lender will take the value of the completed property into account.
Here’s how the process works:
- You submit an application which includes how much you paid for the site/ property, your development or refurbishment costs, professional fees and build timescales
- You will be offered some terms from a lender based on this information and supporting evidence
- Credit searches will be run on your existing finances, experiences and the development location
- Once the loan has been approved there will be ongoing monitoring of your project
Source: Paul McIlroy via Wikimedia Commons
Who uses development finance?
It is often used by builders and developers planning extensive projects and ground-up developments.
For example, if approved, development finance could be used to cover both land purchase and building costs. A lender might finance 50% of a property purchase and 70% of the build meaning the developer would fund a much smaller amount up-front which frees up cash for unexpected expenses or other projects.
What paperwork do I need to produce for development finance?
Because of the nature of this type of loan there is a large amount of paperwork required in support of an application because the lender has to take into account the future value and saleability of the project once it is completed and the short-term loan is repaid.
A lender will need to see:
- Current value of property if owned or purchase price
- Predicted end value
- Your build or renovation costs
- Timescale for the development
- CV of experience
- Details of professionals involved with your project
- Copy of planning permission
- Building regulations
- Details of any Section 106s or any planning restriction if applicable
Can I use development financing if I have bad credit?
It’s highly unlikely that you can use development finance with a poor credit rating. More often than not there will be a very strict application process and credit ratings will be carried out as evidence of your ability to pay back the loan amount.
What are the pros and cons of development finance?
As with any type of business loans there are pros and cons to using development finance and you should always be sure you understand how it works.
Pros of development finance
- Allows you to raise capital
- Quick access to funds which could be made available within 48 hours
- It is a short term loan that means you won’t be tied down with a loan over a long period of time
- Can be used to cover the cost of contractors and materials
Cons of development finance
- You have to provide comprehensive paperwork
- There will be fixed expenses to take into account such as arrangement and exit fees which are likely to be higher than on a commercial mortgage
- Your interest rate will be decided during negotiations between you and your lender
Is a development finance loan the right choice for my business?
Asking yourself a few simple questions will help you decide.
Do I want a short term loan to help me through my development project?
Am I confident I’ll be able to repay the loan once the project is finished?
Can I provide all of the paperwork needed to access the development loan?
If you can comfortably answer these questions, then a development loan might be what you need to support you through your project. If not, you might want to consider a bridging loan? We offer access to the most comprehensive list of development finance lenders and rates as low as 4.5% so why not use our calculator to work out if you’d be eligible for a development loan and how much it would cost you?
Main image source: David Lally via Wikimedia Commons