Many businesses large and small have benefitted from taking out development finance. But what exactly are the advantages of this form of finance?
Rapid access to finance
Development finance can usually be arranged very quickly, certainly faster than you would expect with a mortgage application.
No lengthy repayment period
Development finance loans typically have terms of between six and 24 months, meaning that you won’t be burdened by having the debt for an extended period.
Roll up interest
With development finance, you don’t usually need to make regular monthly repayments. Instead, the interest ‘rolls up’, and you repay all of the capital and interest in a single payment at the end of the term.
Low-interest rates
Interest rates for development finance are not usually particularly high. Experienced developers can expect to obtain lower rates than inexperienced developers, and rates might also be lower for larger projects. If you borrow a lower proportion of the gross development value (GDV), then you might also pay a lower rate.
However, considering all of these factors, 16% per annum might be a realistic upper limit for the interest rate on a development finance project. Experienced developers borrowing a larger amount at a low percentage of GDV might pay as little as 5% per annum.
You can attempt more ambitious projects
If you have access to development finance, it allows you to consider undertaking more complex development projects than would otherwise be the case. It can also make it easier to carry out several development projects simultaneously.
It’s available on a wide range of projects
Development finance is available on newly built properties, residential properties, commercial premises, and semi-commercial properties.
It’s available on a wider range of properties
Getting a mortgage on a derelict property is practically impossible, so this is where the benefits of development finance can really be seen. You can borrow money under a development finance arrangement, refurbish the property and then hopefully sell it for a significant sum.
There’s a limited capital outlay
Apart from any deposit that might be required, you don’t pay anything upfront. This could give you cash to use for other purposes, or simply improve your general cash flow position.
What is development finance?
Development finance is a loan providing funds to either develop or refurbish a property of some description. It might be available for all sizes of development projects, so you might be able to borrow anything between a few thousand pounds and several hundred million pounds, depending on the size of your business and the size of the project. A typical amount to borrow might be 70% of the GDV, which is the estimated market value of the property once the development project has been completed.
How it works with lenders
Unlike some forms of borrowing, with development finance, the full amount borrowed is not usually advanced to you in one go, unless your project is a very small one. Instead, the lender will release additional amounts in stages as the development project progresses. It may want to see a surveyor’s report to confirm that the project is progressing according to schedule before each tranche of funding is made available.
This finance is usually provided on an interest-only basis, with the original loan amount and all of the interest repaid in one lump sum at the end of the term. To repay the loan plus interest, a business might either sell the completed property or re-finance to another arrangement such as a commercial mortgage.
Disadvantages of development finance
However, there are some reasons why development finance might not be the right option for you:
- Some lenders have strict eligibility criteria, and may be especially reluctant to approve first-time developers
- It may be necessary to obtain all required planning permissions before applying
- The application process can be complex, involving a considerable amount of paperwork
- There are a number of fees to be paid by the borrower, including lender arrangement fees, valuation fees and legal fees. However, it is usually possible to add these fees to the loan, avoiding the need to pay them upfront. There is also likely to be a requirement to pay an exit fee on repayment of the loan
- If you apply for development finance via a limited company, the lender is likely to ask the business’s directors to provide personal guarantees. If you apply in your own name, you are personally liable for the entire debt anyway
Book an online consultation with the team at Funding Bay to find out more!
Check out our business loan calculator.
