How to use bridging finance for property development
Whether you involved in property development full time or something you do part time keeping to a budget while developing a property can be challenging - the biggest issue is often cashflow.
How Do You Know How Much Finance do you need?
Each project will have its own overheads, and as such, will require different amounts of finance. On paper projecting a developments costs can seem fairly straightforward however it’s important that you are able to account for detailed costs as much as possible. We say as much as possible, because the very nature of property development is that you need to expect the unexpected - generally speaking delays and alterations to a project will mean additional costs.
Of course, the more experience you have in property development the more likely you can head anticipate bottlenecks and delays however somethings are unavoidable e.g. when building suppliers don't deleiver on time, or key parts of the build are not delivered to specification.
Dealing with Shortfalls
It’s not always the fact that a project has fallen outside of the proposed budget - many property developers will rely on other income sources, but often this is not enough. Raising finance on you own can be time consuming, and high street banks are often slow to react and can have fairly strict criteria before agreeing finance. There can often be significant delays between the time of agreement and the green light being given for funds to be drawn down. This can play havoc with managing the budget and keeping everyone happy on the build.
However in the last 2 years there have been significant improvements in the types of finance available to developers - many solutions are being provided by specialist lenders who understand how critical cashflow can be and offer a range of innovative short term finance funding solutions. Bridging finance is the term often used to decribe short term finance and it comes in various forms.
What is Bridging Finance?
Bridging finance is effectively a short-term loan available time period typically between 1 to 12 months. Funding can be for longer in some cases up to 18 or even 24 months. Bridging loans can be provided for commercial and residential property transactions as well as auction property purchases.
The loan is often secured against a commercial or residential property, so any costs should be factored in, just like any other costs of the project.
The Benefits of Bridging Finance
Bridging finance is designed with property development in mind, so you can be confident that if you do have any questions or queries, then they will be answered by someone who knows the industry and will have experience in dealing with other property developers on a number of unique projects.
Unlike regular-term loans, bridging loans can often be completed within a short timescale. While some websites and brokers promote the fact that you can raise funds within 24 hours this is very uncommon as the lender will want to assess the deal, rationale for teh bridge, security available and the exit strategy for repayment. The logistics of getting a surveyor on site and getting the legals drawn up means that most bridging loans will take at least a couple of weeks from start to finish. If speed is of absolute essence then deals can be completed quickly but this will normally come with higher costs of borrowing.
What Are the Rates Associated with Bridging Finance?
As bridging loans are offered for short-term purposes, when compared to a traditional term loan, the rates associated with bridging loans are higher than conventional medium or longer term finance.
Talk to our specialist bridging team to get a feel for the costs involved. Bridging finance is expensive but it serves a purpose.
It provides finance which can make the difference in developing a property in line with expected timescales; it can allow the purchase of a desired property at auction without the restraints you would have if you were relying on standard mortgage finance. The rates you can expect will depend on the nature of the project and the loan to value. The lenders we work with will provide a offer which outlines the finance, term of finance, costs and repayment terms.
Are There Risks When Considering Bridging Finance?
Bridging loans can offer property developers a life line when either developing or purchasing a property. However, it’s vital that those considering a bridging finance option are able to adhere to the terms of the loan, just as they would with any other financial commitment.