While the name might seem intimidating, your first guess was probably right: development finance is the investment into building a business property or development. The reason why this is so popular is because once extensive work has taken place on a property or plot of land, it is worth much more in the future.
Once you decide to undertake a property development project as a business, you may realise that some funding is needed to achieve the results you need. If the project requires what is referred to as work from ‘the ground up’ and you are essentially buying a plot of land, it’s likely that you will seek out development finance from a lender to help with the cost of the building work. However, development finance can cover a number of different types of projects, which can include:
- Residential properties
- Commercial properties
What does it cover?
First of all, if you’re looking just to refurbish aspects of your business’ property, then you might not need development finance as such. For smaller refurbishments, you might need what is referred to as a ‘bridging finance.’ If you need a lender to pay for a generous proportion of a large-scale project, then development finance might be needed. For example, the lender might pay for half of the cost of purchasing the lot and then anything from 60 – 70% of the total building costs. The benefit of financing it this way is that the business taking out the finance does not need funding for the entire project; they get to finance for around half of the entire development. It’s worth remembering though that development finance covers part of an extensive project, not just feature work.
How does it work?
As with any business loan, you will need first to agree a set amount you need to borrow. Once you are accepted for this amount, you will begin paying it off in monthly instalments. In some respects, it’s a little bit like a mortgage – but not entirely. Unlike a mortgage, this is a short-term loan. Instead of the estate agent evaluating the value of the property, the lender will assess how much the property is worth and then agrees on a total. This total will also be partially based on the business’s finances, too.
Will I be accepted?
This all depends on the financial state of your business, and all your research beforehand. You will need to show any necessary planning permission, and ideally a property portfolio of previous, successful projects. On top of this, development finance is just like any other loan. You will need proof that the loan can be paid back, and that your company possesses a good credit rating.
Property development can be incredibly lucrative for many businesses, and undertaking a sizable development can come with a hefty loan to cover the costs. However, adding another example of your business’ financial prowess to your property portfolio could make taking out development finance a wise and fulfilling endeavour. As ever, it’s advised that you seek advice in terms of what is required from your company with paperwork and planning; don’t hesitate to contact us today for further guidance.