When you embark on a property development initiative as a business or individual, you’ll likely discover you’ll want a degree of financing to achieve the outcomes you want. Development finance is typically used by those who either do not want to tie up all their cash in a single project or where they do not have the necessary funds to complete the build schedule without additional financing.
What is the mechanism behind development finance?
Development finance is unlike a standard loan, whereby you service the debt on a monthly basis. Instead the development loan is split into tranches that mirror the expenses of the build schedule. This enables the borrower to only draw the necessary funds to complete any given stage of the development which in turn keeps their interest costs to a minimum.
As Sarah from Finbri states “The purpose of development finance is both to save money through minimising the loan amount at every stage, and to make money by facilitating a build that you couldn’t have completed without the financing.”
If you only want to repair some elements of a property this would be considered light refurbishment which is not to be confused with development financing. Light refurbishment works can instead be financed through bridge finance.
Conversely, construction financing may be needed whenever you require a lender to fund a significant or vast construction project.
Reasons to apply for development finance:
You could be capable of completing numerous projects simultaneously if you use development finance; otherwise, you’d need to wait until your current development is partly or wholly sold before starting your next project. Using development finance can prevent you from losing out on your next opportunity be it banking a piece of land or buying a site from auction, or other lucrative possibilities.
Development finance also enables you to engage in more significant initiatives of a higher value that you otherwise would not be able to fund. Lenders can be very flexible too, for example, you may also be able to sublet a portion of your pert-completed project property, subject to their approval, and generate income from the development before the loan term is finished.
Development finance can increase your return on investment through better leveraging your cash liquidity. Simply put, you invest far less money into the development but only reduce the profit by a nominal amount thus generating higher returns. is a commitment to constructing a commercial facility or expansion. The rationale for this is because after a property or parcel of land has undergone renovations, it is considerably more valuable in the future. The advantage of arranging it in this manner is that the company seeking out the loan does not require funds for the entire project; they just need cash for approximately a quarter of it.