What is Development Finance?
Development Finance is a loan granted for the refurbishment or development of commercial, residential, or mixed use properties. This type of loan is often utilized by experienced property developers, in order to raise their capital that will finance their business ideas.
Ultimately, the goal of development finance is to establish different financing approaches to provide solutions for business owners, developers, and investors in various industries. Unlike mortgages, the duration of this type of loan is considerably shorter, and ends after the term of the loan when the properties are sold.
A development finance ranges between 6-18 months, and is specifically designed to assist with the purchase costs and build costs associated with a residential or commercial development project. This type of loan involves two main elements–the development site funding assistance and build work costs that are associated for the completion of the project.
There are dozens of terms within the development finance industry, such as loans, debt, bonds, equity, liabilities, credits, guarantees, remediation, collateral, venture, credit enhancement, angels, short-term, long-term, gap financing, and incentives.
How Does Development Finance Work?
The process of development finance in London starts by submitting an application that includes the amount you paid for the property/site, your refurbishment or development costs, build timescales and professional fees. Then the lender will offer you terms and conditions based on the evidence and information that you’ve submitted.
The lender will also run credit searches on your experiences, development location, and existing finances. Upon the approval of the loan, the lender will consistently monitor the ongoing construction project.
Documents Needed Upon Development Finance Application
- Building regulations
- Estimated end value
- Predicted time needed
- Your renovation or build cost
- Curriculum vitae of experience
- Planning permission document
- Information about any planning limitations
- Information about the professionals involved
The application for this type of loan can be quite strict. People with poor credit scores may have less chances of getting accepted, since these scores give lenders an objective measurement of your credit risk. The higher your credit rating is, the better your chances to get accepted for a development funding.
Adding another example of your business financial prowess to your property portfolio or curriculum vitae of experience could make taking out development finance a wise and fulfilling endeavor, since property development can be quite lucrative for many businesses.
Advantages & Disadvantages of Development Finance
With this type of loan, what we are looking at is buying a site or a property and its worth after the refurbishment gets finished. However, just like any other loans, development finance comes with both advantages and disadvantages.
Advantages of Development Finance
- Needed funds can be accessed quickly
- Won’t tie you down for a prolonged period of time
- Can be utilized to pay for materials and contractor fees
- Gives you the ability to raise needed capital for your property or business
- Provides low interest rate, which improves the rate of return for the project.
Disadvantages of Development Finance
- The terms set by lenders can be restrictive
- Requires a lot of paperwork and documents
- Potential risks can easily erode your profits quickly