What is Development Finance and who is it for?

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What is Development Finance

Construction companies and developers have no shortage of options to explore when looking to finance small and large property development projects. Examples of these include commercial mortgages, business loans, bridging loans and other types of specialist secured loans. Another option is bridging finance; a funding solution designed specifically for property development and construction projects.

What is Development Finance?

Development finance is usually offered exclusively to experienced builders and developers, as a flexible and affordable way to fund larger and more ambitious initiatives.

What is Development Finance and for who

But what is it about development finance that differentiates it from the other more conventional options available? How does development finance work, and what types of projects is it suitable for?

How Does Development Finance Work?

The fundamentals of development finance are quite straightforward.

With a traditional loan or mortgage, the lender will issue the loan based on the value of the property or development at the time. With development finance, the lender considers the future value of the completed property when issuing the facility.

How Does Development Finance Work

The developer is, therefore, able to borrow money far in excess of the value of their asset at the time. However, the funds raised by way of development finance are released gradually as the project progresses, not as a lump-sum payment when the loan is authorised.

As a result, the developer will always need to invest money that is owned by them in the project or cover some of the project’s costs using a different facility.

Here is a basic summary of how development finance works:

  • An application is submitted, including a total breakdown of the projected costs of the project and a formal valuation of its future value.
  • In accordance with the evidence provided, the lender will make an offer. This will include details of the maximum Loan-to-Value they are willing to offer, interest payable on the loan and other terms and conditions (such as commission payable on the final value of the development).
  • An extensive search will be conducted on the applicant’s financial history and general track record in the property development profession.
  • If the loan is approved, the first instalment will be issued, and the project can commence. After which, the project will be carefully monitored by the lender and subsequent instalments will be issued upon successful completion of various stages of the project.

An independent third party will be hired by the lender to monitor the progress of the project, who will determine when and where the next instalment can be released.

Who Uses Development Finance?

Development finance is the preferred choice of property developers and builders looking to cover the costs of extensive projects. A typical development finance specialist will offer the capital needed to cover a maximum of 80% of project costs, 80% LTV, which means that the remaining 20 per cent will need to be sourced elsewhere.

Who Uses Development Finance

Some developers will use their own capital to cover the remaining costs, while others will seek second-charge (and sometimes third-charge) loans to top their first-charge development finance product.

What Paperwork Do I Need to Apply for Development Finance?

The more extensive the evidence you provide to support your case, the higher the likelihood of qualifying for a competitive deal. Your broker will help you prepare all the necessary paperwork ahead of time, along with the financial projections you will need to secure the support of your preferred lender.

Eligibility requirements vary from one lender to the next, but all development finance specialists will expect to see the following:

  • Formal valuation of the property’s current value
  • Predicted end value upon completion of the project
  • A full outline of build or renovation costs
  • Timescale and deadline for the development
  • Evidence of experience in property development
  • Information on the other people involved in the project
  • Copy of planning permission and building regulations
  • Building regulations

Issues with paperwork and documentation are the single biggest cause of delays and complications in the development finance application process. It is therefore advisable to consult with an experienced broker at the earliest possible stage, in order to ensure your documentation is in order.

Can I Qualify for Development Finance with Bad Credit?

Development finance specialists are more interested in a developer’s broader track record than their current credit score. Credit checks will always be carried out as part of the vetting process, but bad credit will not necessarily count you out of the running.

Can I Qualify for Development Finance with Bad Credit?

Some development finance companies are more than willing to work with subprime applicants if the rest of their case is convincing enough. For example, if you have an extensive track record of success in property development but have a few negative entries on your credit file, you could still qualify for a competitive deal.

Again, broker support should be sought at the earliest possible stage, if you have any questions or concerns regarding your credit status.

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