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The Meaning and Importance of Development Finance

Development finance is the tool of choice for property developers and construction companies looking to fund planned projects. But how does development finance work, and who exactly is it suitable for?

What is Development Finance?

In essence, development finance is a specialist type of bridging loan. It is a strictly short-term funding solution, issued to cover the costs of all types of property development and construction projects.

Typical loan terms vary from six months to two years, after which the full balance of the loan is repayable. Development finance can be repaid by selling the property/development to raise the required capital, or by transitioning the loan to a longer-term repayment product (like a buy-to-let mortgage). 

How Does Development Finance Work?

All development finance products are bespoke solutions, tailored to meet the exact requirements of the borrower. However, the basic steps in acquiring development finance are fairly consistent.

The process works as follows:

  1. An application is submitted, containing a detailed valuation of the property, its projected future value, all estimated project costs, and a timescale for completion of the project.
  2. The lender then conducts a full credit search and background check on the applicant, assessing their track record in similar projects to date and their current financial status.
  3. If the lender is satisfied that the applicant is a viable candidate, an offer will be made, complete with full disclosure of terms, conditions, and repayment requirements.
  4. Upon agreeing to these terms and conditions, the borrower signs the agreement, and the first instalment of the loan is transferred within a few working days.
  5. Each subsequent loan instalment is then issued upon completion of specific phases of the project, overseen by a surveyor hired by the lender.
  6. Interest accrues on a monthly basis (typically around 0.5%), and the full outstanding balance is repaid in a single lump sum on an agreed date, six to 24 months later. 

There may also be the option of repaying the interest on the loan with monthly instalments, but most developers prefer to ‘roll up’ interest payments into the final amount repayable.

How Much Can I Borrow with Development Finance?

There are no limitations to how much can be borrowed with development finance. Maximum loan values vary in accordance with the size and value of the project, the experience and track record of the borrower, the financial status of the developer or construction company at the time and so on.

Most lenders are typically willing to lend up to 80% LTV (based on the total costs of the project), but it is nonetheless possible to borrow up to 100% in some instances. A first-charge development finance loan can be complemented with mezzanine finance, enabling 100% of all project costs to be funded externally.

What Documentation is Needed to Submit an Application?

The strength of the application you submit will determine not only your eligibility, but also the affordability of your development finance loan. 

As a bare minimum, your lender will expect to see the following:

  • Detailed evidence of the property or development’s current value
  • An accurate estimate of its future value upon completion
  • Comprehensive details of all construction, renovation and development costs
  • An approximate timescale for completion of the project
  • Evidence of an established track record in similar development projects
  • Copies of planning permission and any other permits required
  • Proof of due diligence and effective contingency planning
  • Details of all other contractors and contributors involved in the project

Along with the above, you will also need to provide convincing evidence of a viable exit strategy – i.e. how and when you intend to repay your development finance loan.

Can I Get Development Finance if I Have Bad Credit?

Development finance for poor-credit applicants is available, but can be trickier to track down. Some lenders automatically decline applicants based on credit scores alone. Elsewhere, others welcome ‘subprime’ applicants, basing their decisions entirely on their current (as opposed to past) financial status.

If you intend to apply for development finance but have concerns regarding your credit history, consult with an independent broker before applying. Should development finance not be a viable option, you may still be able to qualify for a bridging loan to fund your property development project.

Syandita Malakar
Syandita Malakar
Hi guys this is Syandita. I started Business Module Hub to help you all to post updated articles on technologies, gadgets. Although I love to write about travel, food, fashion and so on. I quite love reading the articles of Business Module Hub it always update me about the new technologies and the inventions. Hope you will find Business Module Hub interesting in various way and help you accordingly. Keep blogging and stay connected....!
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