Development finance is an ideal solution for developers and property investors looking to fund the construction or refurbishment of their properties using short-term funding solutions. When looking at funding for your development project, it is imperative that you familiarise yourself with all the options available so that you can make an informed decision.
What is development finance?
Development finance is a short-term loan for property development that is exclusively used for the construction or refurbishment of a property or property. It provides funds for investors and developers to manage project purchases and build costs.
Whether you are considering a residential, commercial, or mixed-use project, development finance could be a funding option available to you, including ground-up new builds, knock-down and rebuild projects, conversions, and refurbishments.
Development loans are typically arranged very quickly as opposed to other long-term funding products, such as mortgages, which can take considerably longer to be approved.
Most lenders will offer a loan period of 6 to 24 months; however, some, but not all, may extend this should you need to.
Although similar to bridging finance, development finance can provide both an upfront loan towards the site acquisition as well as further funding released at different stages throughout the project.
The Advantages and Disadvantages of Development Finance
Development finance offers unique benefits to property developers that other loan products can’t; however, it is vital that you take into consideration both the advantages and disadvantages before starting your development project.
Advantages
- Quick to arrange
Development finance can be made available quicker than applying for a mortgage. Funds can be arranged in a short space of time, typically between 1 and 4 weeks, which allows the development project to get underway while alternative funding is arranged.
- Short-term loan
Development finance loans are available for a short period of time, usually between 6 and 24 months. The transient nature of this type of finance reduces the risk of being burdened by debt for an extended period or facing high early repayment penalties should you wish to repay early.
- Roll-up interest
Development finance offers developers the opportunity to repay all the capital and interest in a single payment at the end of the term. The interest ‘rolls up’, eliminating the need for regular monthly payments.
- Competitive interest rates
If you are an experienced developer, you may be able to secure a development loan at a lower interest rate than inexperienced developers. Loans can be secured at a lower interest rate for larger projects and can be further lowered if you borrow a lower proportion of the gross development value (GDV).
Considering all these factors, we have a realistic range of 16% per annum as the upper limit for the interest rate on a development finance project that can go as low as 5% per annum for experienced developers borrowing a large amount at a low proportion of the GDV.
- Take on large projects.
Development finance paves the way for developers to take on ambitious projects with higher complexity and enables them to work on multiple development projects simultaneously. Traditional financing options can restrict developers from experimenting with more complex projects, whereas development finance offers the flexibility to work on projects of varying size and complexity.
- Available for a wide range of projects
Development finance is ideal for new-build, residential, commercial, and semi-commercial property development projects. It is especially beneficial for properties that require remedial work prior to being funded using traditional forms of financing. Developers can borrow loans even for derelict properties that would be impossible to get a mortgage for. The short-term financing option allows developers to refurbish any property and sell it at a profit.
- Limited capital outlay
Development finance doesn’t require any upfront payments other than your deposit. Instead, your cash on hand can be used for other expenses or simply to improve your cash flow position.
Disadvantages
- Eligibility criteria
Most lenders have strict eligibility criteria when approving development finance, particularly when the borrower is a first-time property developer. Developers with extensive portfolios will find it significantly easier to be approved for this type of finance.
- Planning permissions
Many lenders will require you to have all planning permissions needed for the development in place before considering any application for development finance. Issues with planning may cause considerable additional costs and problems down the line, and therefore the lender will want to see evidence that planning has been approved prior to approval.
- Paperwork
As the application process for development finance can be complex, it is imperative that you have all your paperwork in order before you apply. Lenders will expect to see an extensive plan detailing all aspects of the development, including planning permission, designs, drawings, and most importantly, costings.
- Additional fees
It is important to take into account any additional fees when costing your development project. These include arrangement fees, valuation fees, and legal fees, which can usually be added to the loan amount and therefore will not need to be paid upfront. There is also likely to be an exit fee at the end of the loan period when full repayment is made.
- Development finance for limited companies
For limited companies applying for development finance, most lenders will require some form of personal guarantee from the company’s directors to minimise the risk to themselves. It is worth noting that individuals applying will be personally liable for the entirety of the loan.
Who uses development finance?
As the name suggests, development finance is primarily used by property developers and investors for ground-up and extensive renovation projects. Funding can be used for land purchases and for the entire building cost. It is not unusual for a lender to fund, for example, 50% of the land purchase and 70% of the building costs, meaning that the developer will have fewer upfront costs, which in turn positively affects their cash flow, which can be used in other areas.
Is development finance right for me?
Once you have conducted your due diligence, it is time to make a final decision. So, how do you determine whether development finance suits you and your business needs? Answering a few simple questions can help you gain a better understanding:
Evaluating your business needs is the first step to determining if development finance is ideal for you.
- Analyse whether your business needs a short-term cash inflow or long-term financial aid.
- Assess your current financial situation to determine your ability to repay the loan on time without disturbing your finances.
- Lastly, gauge if you can provide the necessary paperwork to qualify for and access the development loan.
If you can answer these questions comfortably, development finance might be what you need to fund your project. An experienced development finance broker can help developers access the most comprehensive list of development finance lenders at the lowest market rates.
Individuals, builders, and businesses looking for quick, short-term funding can benefit from development finance to fund their development projects. It provides access to the funds developers need to develop or renovate residential, commercial, or mixed-use properties.
Working with an experienced development finance broker, such as UK Property Finance Ltd, ensures that the funds you require will be delivered on time and professionally. Talk to our team today for flexible, fast property development loan financing.