Have You Considered Development Finance?
Property developers can face multiple challenges in completing projects due to several challenges, including adequate and easily accessible financing. Also, factors beyond developers’ control can halt the development flow, inflating the project costs and leaving developers with debts.
As a developer, you may have various financial avenues but have you considered development finance? Continue reading for more information on how it works.
What Is Development Finance?
Development finance has been a mainstay in the construction and real estate industries for a long time. Builders and developers can apply for development finance to raise capital, enabling them to actualise their development projects.
Often, lenders give out development finance as a short-term property loan spanning 3-24 months covering multiple project types at different stages. For instance, you may qualify for development finance if your residential project is at the ground stage. Commercial, mixed-use, refurbishment, conversion, and knock-down projects can also qualify.
Development finance differs from other financing options in several ways. Generally, lenders prioritise property valuation in the loan acquisition process. But development finance institutions will only consider the value of a completed property, unlike mortgage lenders who may consider property value at other stages.
The process usually starts by submitting an application to the lender with details including your build timescales, development costs, property and professional fees, etc. Development finance lenders will assess your application, considering your existing finances, team’s experience, and building location.
That’s how development finance works. The next section can help you determine whether or not you need a development finance handout for your project.
When To Consider Taking It Out
Like any financing avenue, development finance comes with specific requirements, pros, and cons. You will need to have considered the following if you intend to apply for development finance:
- Have the right paperwork
Development finance lenders require the planning permission given to developers by established authorities, development costs through the remaining stages of your project, and the details of all professionals behind your project, from architects to contractors.
Also, you’ll have to table an asset, liability, income, and expenditure summary during your application process. It helps lenders understand how you can absorb unexpected costs and determine the amount of personal guarantee you can support.
- Know your exit strategy
After completing the project, you need to be more than confident about repaying your loan. For this reason, lenders will require a solid exit strategy, regardless of your commercial plans. Lenders will require assurances about your strategy’s viability, regardless of your final plans.
- Ready to bear fixed expenses
Remember, there can be fixed expenses like arrangement and exit fees to factor into your calculations. These expenses may be higher than what you’ll get on a commercial mortgage. And you must brace yourself for these expenses if you want to consider development finance.
Lengthening Your Terms
Development finance loans come with a 3-24 month duration, and this term cuts across many lenders on the financial market. However, you can opt for an extension, known as refinancing, if your development project is delayed. Recently a third of property developers have had to pause projects over cost uncertainties as a result of shortages of skilled workers, long delivery times and rising fuel prices.
Ensure you complete your refinancing commitment from a trusted broker to help you manage your project costs efficiently.