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What is Development Finance?
Development finance, or property development finance, is a form of funding that enables property developers to undertake construction, renovation, or conversion projects.
These tailored loans can provide capital to cover various property development expenses, such as land acquisition, construction costs and planning permission fees.
In this guide, we’ll explore how property development finance can be used and when its flexibility can benefit property development projects.
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Benefits of Development Finance
What is Ground-Up Development Finance?
How much can I Borrow with Development Finance?
Understanding the Costs of Development Finance
What types of Development Finance Lenders are there?
How do I apply for Development Finance?
Need Help Finding a Development Finance Loan?
What is Development Finance?
Development finance is a form of short-term funding specifically designed for property construction, conversion, or refurbishment projects.
Funding is released in stages, with the initial amount used to purchase land or refinance existing debt and the rest of the funds can be used to cover construction costs.
- Cash flow management and progress monitoring are an integral part of development finance. Lenders will assess the project's advancement and compare it to the initial information provided during the application process. This can ensure that developers adhere to the project's timeline and goals.
- Development finance terms can vary depending on the project's scale. For quick access to funds, development finance bridge loans can provide short-term financing solutions that are usually repaid within a year.
- For larger projects, such as ground-up developments, more complex financing options with longer terms - ranging from several months to up to 36 months - are available. A longer-term development finance loan can accommodate the extended time required for planning approvals and construction.
See similar: London Airspace Development - How to Secure Finance
Benefits of Development Finance
Short-term development finance can bridge financial gaps during development projects and can also cover 100% of the development costs over a longer-term loan. Here are some of the benefits of development finance:
Quick access to funding
Short-term development finance offers a fast approval process, with funds available in as little as seven working days.
Bridging loans for project gaps
It includes bridging loans to cover gaps between project stages or unexpected expenses, which is helpful when securing other funding is delayed.
Heavy refurbishment projects
Short-term finance is available for significant refurbishments requiring structural work, though interest rates may be higher.
Extended loan terms
Loan terms can exceed the standard 12-month bridging loan period, up to 18 or 36 months for larger projects with planning and construction needs.
Flexible repayment options
Developers can structure repayments to align with project timelines and cash flow, ensuring effective financial management.
Specific terms and eligibility vary among lenders. Working with a development finance specialist can help you find the right solution for your project.
What is Ground-Up Development Finance?
Ground-up development finance funds major new-build projects. This usually requires the approval of building plans and assistance from architects, builders, and tradespeople. It is a complex form of financing with significant investment releases at different project stages.
Having a proven track record is crucial to access the best development finance rates. Lenders seek assurance that borrowers possess the necessary experience and skill set to execute the development successfully and manage risks.
However, new or less experienced developers can still find financing options. Some lenders consider factors like project viability, borrower's financial situation, and overall feasibility, even without an extensive track record.
Researching financing options and working with a development finance broker or consultant is recommended. Our development finance brokers can assist in navigating complexities, preparing documentation, and connecting developers with lenders who support projects from new or less experienced developers.
How much can I Borrow with Development Finance?
Your borrowing potential for property development finance will depend on the Gross Development Value (GDV), the borrower's development experience, and your overall financial situation. These are the main factors, but the specific lender may make other considerations.
Lenders typically offer loans up to 65% of the GDV, which can vary. Experienced developers with a successful track record will likely secure more significant loan amounts. In cases where developers have made significant financial contributions arranging additional mezzanine finance of up to 90% of the Gross Development Value (GDV) is possible.
Lenders will assess the borrower's income, assets, liabilities, and creditworthiness before the application.
A solid financial position and a proven ability to repay the loan will positively impact your borrowing capacity. It is always a good idea to consult with a specialist finance broker beforehand to understand specific eligibility and loan amounts and help with the application process or specific borrowing capacity enquiries.
At Clifton Private Finance, we have a vast network of lenders, enabling us to find the perfect solution tailored to your specific requirements:
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We offer borrowing amounts ranging from £50,000 to £25 million, suitable for projects of all sizes.
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Our loan terms are flexible, spanning from 1 month to 5 years, and accommodating different project timelines.
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We provide competitive rates, ensuring cost-effective funding solutions.
Understanding the Cost of Development Finance
Interest Rates
Development finance generally has higher interest rates due to increased project risk. Development finance rates depend on the project's risk profile, borrower's experience, and lender's criteria.
With development finance, interest is only paid on the amount of money drawdown through the drawdown facility. This allows borrowers to manage expensive interest payments throughout the course of the loan.
Repayment Periods
Development finance often has shorter repayment periods. Careful planning, accurate cost estimations, and effective project management are crucial to meet repayment obligations.
Pitfalls to Avoid
Mitigate risks by avoiding inaccurate cost estimations, sticking to initial plans, preparing for delays and material shortages, providing sufficient inspection notice, partnering with experienced professionals, and conducting thorough due diligence.
Try our development finance calculator below to get a better understanding of your costs:
What types of Development Finance Lenders are there?
A lender's suitability usually depends on the development project's specific requirements and circumstances. Different development finance lenders will all have their advantages and factors to consider.
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High Street Banks offer competitive rates and specific criteria, while Challenger Banks provide innovative alternatives with flexible criteria and tailored solutions.
Or there are specialist development lenders who focus exclusively on development finance, offering customised solutions with their extensive industry knowledge. And lastly, some short-term lenders specialise in short-term development finance, providing quick funding for bridging gaps or shorter-timeframe projects.
All of these options cater to different types of development projects and financing needs, and a good broker will have relationships with a variety of lenders and can get you the best deals on the market.
How do I apply for Development Finance?
When applying for development finance, you’ll be required to provide a detailed project proposal, including the property details, development plans, estimated costs, and the expected returns from your project. This will showcase the scope, timeline, and financial requirements of your project.
- A lender will require documentation such as proof of identity, address, financial statements, bank statements, planning permission, construction plans, and other project-related documents to support your application.
- Limited companies will need to provide additional documentation such as company accounts, director's information, shareholder details, and any debt or liabilities associated with the development.
- During the application process, there may be additional security requirements based on the project and the lender's criteria. These may include collateral or personal guarantees to mitigate the lender's risk.
A specialist finance broker can make the application process smoother and use their expertise and network of lenders to increase your chances of success.
We can help find a development finance loan that is suitable for your property project and financial circumstances.
Need Help Finding a Development Finance Loan?
Clifton Private Finance is here to support you if you're seeking a development loan and need assistance finding the perfect lender.
With our extensive expertise and knowledge in the development finance market, we can connect you with lenders who meet your specific requirements. We adopt a personalised approach to match you with the right lender for your circumstances, and our comprehensive market access ensures you receive the most competitive rates available.
When it comes to important financial decisions, it's always advisable to seek the guidance of a specialist finance broker. Our team is dedicated to ensuring you secure finance at a favourable and affordable rate that suits your needs.
Contact us today at 0117 959 5094 to discover how we can assist you, or book a consultation below.
FAQs
How much deposit is required for development finance?
Typically, lenders require a deposit of 20-30% of the total project cost, which can vary depending on the lender and the specific project.
Can I refinance my development finance loan once the project is complete?
Yes, it is possible to refinance a loan once your development project is complete. This may allow you to secure better terms or release equity.
You can also secure development exit finance part way through your project development as a cheaper alternative to switch to, which can save on costs.
What happens if my project faces delays or unforeseen challenges during the development process?
It's essential to have contingency plans in place. Communication with your lender will be beneficial. This may allow you to explain your situation and explore possible solutions with your lender, such as extending the loan term or adjusting the repayment schedule.
