Development Finance Or Bridging Finance For Construction Projects

Getting traditional construction financing has never been easy, and it’s only getting worse. This is especially true in the United Kingdom, where lender scrutiny has increased in recent years, making it more difficult and time-consuming than ever for construction firms and projects – even those with a healthy order book and a track record of sound financial conduct – to secure the funding they require to expand. 

How can construction companies plan to fund expansion, manage cash flow, procure materials for new projects, and plan for the future without the help of traditional lenders?

So, here is the solution for funding, i.e., development finance and bridging loans. 

Bridging finance and development finance are frequently confused by one other, especially by developers looking for construction projects. While there are some similarities between them, such as the following: 

• They can be utilised to assist in purchasing both residential and commercial real estate.
• They’re frequently used to get around traditional real estate chains. It’s a secured loan.

When it comes to launching a new development or construction project, determining which financing option is best can be challenging. This guide explains the distinctions between the most regularly utilised property development financing solutions. 

Bridging Finance For Construction Projects

Bridging loans provide a flexible, short-term (typically 12 months or less) financial option for practically all types of real estate transactions, including restorations and development projects. Bridging loans are frequently used to bridge a financial gap until longer-term funding or an alternate source of funds becomes available; thus, having a sound exit strategy is critical. It’s also a common choice for: 

• Buyers interested in bidding on a property at an auction house
• Homeowners who are relocating but have not yet sold their current residence
• Those looking to raise funds for their company’s expansion

One of the most appealing aspects of bridging finance is how quickly it can be provided, often in as little as 48 hours, depending on the conditions. If you choose a bridging loan, the money will usually be given to you in one single amount, allowing you to finish purchasing a home on time. This is especially critical for an auction because you must give the whole funds within 28 days of the gable hitting. As a result, bridging loans can be a good option when you need money immediately.

Bridging finance can be utilised for a range of construction and renovation projects. This could range from remodeling your kitchen or adding an addition to constructing several homes or business units. 

It’s vital to remember that a bridging loan should only be utilised for significant development projects if the project can be finished within the bridging loan’s shorter time frame. Going over term could result in additional fees. 

• Lending Criteria For Bridging Finance

Bridging loan standards are much more lenient and flexible than those for other types of financing. Bridging lenders are willing to lend to first-time developers if they can provide adequate security and the project is low-risk overall. Bridging loans can even fund minor development initiatives to establish a portfolio before moving on to more significant projects. A bridging loan’s maximum Loan to Value (LTV) is usually set at 75 per cent. 

• Interest Rate

Interest is calculated on a monthly basis and might range from 0.4 percent to 1.25 percent every month, depending on the situation. So the interest is added to the loan facility, which is repaid with the capital at the end of the period; no monthly payments are required. 

• Calculating The Cost Of Bridging Finance 

You can figure out what interest rate you’ll be paying by using an online bridging loan calculator.

A facility/arrangement charge, which typically costs 2% of the net or gross loan amount, is another consideration cost. However, if you borrow more than £150,000, it may drastically reduce this cost.  

The secured property or land value will be necessary to put up a bridging loan. The price will differ based on the surveyor and the type or size of the property. In addition, there will be legal fees, exit fees, and maybe broker fees to consider. 

Development Finance For Construction Projects 

Development finance is a type of loan that is used to fund construction, renovation, and development projects. Firms can use development finance to support land acquisition and construction expenditures for new developments and provide cash for smaller repair or conversion projects. The maximum term offered is usually three years, and you can figure out how much it will cost you by using a development finance calculator. 

Many development financing loans will be paid out in instalments, especially if the land is involved. To secure the site, an initial sum (typically up to 70% of the land’s worth) will be released, followed by the rest of the funds being released in phases throughout the development process.

As opposed to bridging, development finance has the advantage of providing the most significant funding facilities. Almost any property restoration, conversion, or construction project can benefit from development financing. As a result, this type of specialised financing is better suited to people who: 

• Are planning to build a new home from a piece of land
• To finance the costs of construction
• To expand or construct a new structure

• Lending Criteria For Development Finance

The maximum Loan to Value (LTV) for development finance is typically 70% of the project’s Gross Development Value (GDV). However, an LTV of up to 80% may be attainable in some cases.

Your experience and track record as a property developer is significant to development finance lenders. They’ll want to see what kind of projects you’ve completed in the past, as well as how successful they were and how much money you made from them. 

• Interest Rate

The monthly interest is charged to the borrowing facility and might range from 4% to 15% each year, depending on the conditions. The amount paid will be determined by the LTV, your past developer expertise, the type of project, and the location of the development site. 

End Note!

A construction project can go through several stages; therefore, it’s a good idea to start with a financial plan to get it from one stage to the next. Nothing is more damaging to a project than running out of funds. So, select the best option that suits your needs and budget. 

UK Property Finance is a master funding broker that provides tailored bridging loans and development finance to everyone. Our strategy is to assist you in planning the entire project. This means fewer forms to fill out, quicker and easier decisions, and lower professional expenses. 

Having the best relationship with the experts throughout your growth is essential for improving communications and providing you with the guidance and support you require.