There are many different types of business finance, with different aims and purposes; in this article we will specifically look at Development Finance. If you are considering building or refurbishing a commercial property, then you may be interested in how development finance can help your business. A very specialised type of commercial finance, in this blog we will aim to explain what development finance is, its unique features, and the process for securing this type of finance.
What is Development Finance?
Development finance is a type of business loan that is specifically for the use of building or refurbishing commercial property. This type of finance can be used to purchase land and pay for the development costs of that land including the purchase of materials and labour. Alternatively, development finance can be used to meet the refurbishment costs for an existing or newly purchased commercial property.
When buying traditional property using a mortgage the broker will consider the value of the property. Where there is no physical property to value or the property is in such a poor state of disrepair that the valuation isn’t reflective of the price, a mortgage is not a suitable finance option. This is where development finance comes in.
A short-term form of finance, development loans are usually provided over 6-24 months. Following development of the land or completion of the refurbishment the loan will be repaid either via the sale of the development or through securing a longer-term source of finance such as traditional mortgage.
Key Features of Development Finance
A type of business loan, development finance allows you to borrow money for your business. However, there are some key differences between development finance and a traditional commercial loan. The key features of development finance are listed below:
- Specifically for development or refurbishment of commercial property
- Short term loan 6-24 months
- Maximum loan usually 70% of land costs and 100% build costs
- Funds may be paid in stages throughout the project
- Interest charges are usually added to the loan value
- Clear exit plan is required
Process of Securing Development Finance
An experienced commercial finance broker, such as MC Commercial Finance, can help you to secure the right finance for your business. With access to many different lenders and special offers a broker has many years of experience in securing development finance. Knowing which lenders to approach, and what information that needs collating prior to application can help you to ensure that your application is successful and as hassle free as possible. The process is outlined below:
- Contact MC Commercial finance
- Agreement in principle
- Site visit
- Loan offer
- Legal paperwork
- First payment
- Subsequent payments
- Repayment of the loan
MC Commercial finance can help you through the process of identifying suitable lenders for your needs, and the application process. Once an agreement in principle has been offered, there will be a visit to the development site and a valuation before a final offer can be made. This process protects the lender as the value of the loan is secured on the suitability of the potential development or refurbishment.
As part of the application process, you will need to define a clear exit strategy for repaying the loan. This is usually dependent on what the loan was used for. In the case of developing land to build properties to sell on, the loan would be repaid upon the sale of the property/properties. If the development loan was for refurbishment or for commercial premises that will be used by the business, then a longer-term source of finance would need to be secured such as a traditional mortgage.
Benefits of a Development Loan
As with all business finance there are pros and cons. Sourcing any type of finance should be done with care, via a reputable lender, affordability, and ability to repay the loan should be carefully considered. However, there also potential benefits including:
- Enabling your business to take on larger projects than would otherwise be possible
- Maintains your cashflow as it is not tied up in the project
- May allow multiple projects to be completed simultaneously
Development Finance Broker
Now you understand what development finance is and how it might be of benefit to your business, you may like to consider contacting MC Commercial Finance for more information. We are an independent broker, working in the best interests of you and your business to secure the most appropriate type of finance at the best rate possible. Give us a call and find out how we can help your business.