If you are a first-time developer, in order to get your project off the ground, you need the necessary funds. However, if you don’t already have a portfolio of work to support your applications or properties that you can sell in order to fund your venture, you may think that securing the necessary funds is impossible, but that couldn’t be further from the truth.
At Bridging Finance Solutions, we continue to provide development finance for first-time developers, and we know exactly what it takes to secure these loans.
In this beginner property development finance guide, we will outline some of the ways that you can ensure that you receive the funding you need to complete your project.
Keep reading to find out more.
What is Development Finance?
A development finance loan is a short-term bridging loan designed to help fund the development of a property and will be secured against either the property itself or the land it is on.
These loans aim to cover the land purchase, the construction costs and any substantial renovations that are necessary.
The terms of your loan are designed for your project, usually spanning 12 months, and you are expected to pay interest on the money you have borrowed, but the interest you pay depends on the amount you have borrowed and the conditions of your loan, which will be discussed with your lender or broker.
Can First-Time Developers Get Development Finance?
First-time developers can secure development finance, but they may expect stricter criteria. The lender may offer lower loan-to-value ratios to reflect the risk the lender is taking.
Independent lenders, such as ourselves at Bridging Finance Solutions, have much more flexibility in choosing the projects we work on, and we are open to working with new entrants as long as they come to us with a solid business plan.
What Do Development Finance Lenders Look For?
Not sure what lenders are looking for when trying to obtain development finance? Some things that lenders consider when they meet a new applicant include:
The Project
When it comes to specialist lenders, if you have no previous portfolio to review, you really need to sell the project you are proposing. At Bridging Finance Solutions, we back projects we really believe in and that make sound economic sense. If your pitch doesn’t look likely to deliver a return, for both client and lender, the application may come to a halt.
Make sure you have a clear, accurate plan for your development before you approach lenders, as this will increase their interest in your project.
Your Personal Profile
Without an established portfolio of developments, lenders will review your online presence and personal background to establish trust. If you have a poor online review for any past work and no previous properties for the lender to review, they may be less inclined to work with you.
Investors want to know about how you have handled past challenges, even if they weren’t necessarily linked to property, as this provides a good indication of how you will handle a high-risk development.
Ultimately, private investors want to collaborate with individuals they trust and believe are the right fit to complete projects to a high standard, especially since new developers are considered high risk.
Development Appraisal and Feasibility
A development appraisal and feasibility study are essential for any development, as they can help transform a high-risk proposal into a bankable project. Lenders will look at your appraisal and feasibility report to see if your project is worthy of a development loan.
Lenders need to ensure that your project can generate sufficient profit to cover your loan repayments, and an appraisal provides clear insight into whether your project is worthy of the investment.
Property Development Projects: How Much Can You Borrow?
The amount of money you can borrow for your first development is at your lender’s discretion, and as a first-time developer, this may be reflected accordingly by a reduced amount available..
Though it may vary by lender and project, first-time developers can typically expect to borrow 65%-75% of the Gross Development Value, or around 70% of the total project cost.
Most development finance lenders expect you to repay the loan within 12 months, but this can be negotiated if you require more time for the project; it really depends on the lender. If you have any further questions about how our loans work, our FAQs page may be a useful starting point.
How to Strengthen Your Application
Looking to apply for a development loan and want to improve the chances of your application being accepted? Here are some ways that you can strengthen your application.
Prepare Comprehensive Documentation
Before you even reach out to a lender, you must ensure that you have the appropriate documentation prepared. This includes a detailed project plan, the full timeline of your development, the team you will be working with, costings and contractor quotes, and, most importantly, planning permission.
If you don’t already have the necessary permission to start your project, most lenders will be reluctant to work with you, as there is very little chance the project will come to fruition without the required planning permissions.
It is also important to provide any architectural drawings or plans that you have for the project, as this allows your lender to get a full scope of the project.
Before you apply, you should also create a file of financial documentation, including bank statements and proof of funds for the deposit you plan to include with your application.
Create a Contingency Plan
When it comes to property development, it’s not always smooth sailing, and things may go wrong or deals may fall through. When applying for property development finance, you need to mitigate the inherent risks of development, manage construction overruns, and account for market volatility.
Your lender will want to see a contingency plan, particularly focused on the costs for your project. It is not uncommon for development projects to exceed initial budgets, so you are expected to create a contingency fund when applying for first-time developer funding of around 5-10% of the overall costs, as this will ensure that you can complete the project without running out of cash and demonstrate forethought to your lender. Each lender will have their own % requirement for a contingency fund
It’s important to build lender confidence, and having a strong contingency plan in place can help do this.
Highlight Your Professional Team
Successfully developing a property requires teamwork and the expertise of various professionals. Even if you lack personal development experience, having a skilled team of contractors, architects, and surveyors can make a significant difference. When your lender sees this expert support, they are more likely to view your project as realistic and achievable.
So, if you’re working with an experienced team on your development, make it clear to your lender, which may improve your chances of loan approval.
Create a Strong Exit Strategy
Arguably, one of the most important aspects of your loan application is your exit strategy. Ultimately, lenders will only finance a development if they know their loan can be redeemed successfully, and they will not enter into a contract unless they are completely confident this can be achieved.
You have to be able to provide an accurate estimate of when you will be able to repay the loan and how, whether through the sale of your property or by securing a more permanent re-financing solution.
Without a feasible exit strategy, lenders will not be able to sanction a loan, even if the project has great potential.
Why Work With a Specialist Broker?
Choosing the right lender is vital to meet your needs. Engaging a specialist broker for your first property refurbishment finance or ground-up development bridging loan is important for handling complex lender requirements, securing better rates, and meeting tight funding deadlines. Brokers grant access to exclusive, non-high-street lenders and manage the detailed underwriting process to help structure your deal successfully.
If you work with a specialised, local lender, they also know your area, market and local competition well, so they may even be able to share some valuable insight or put you in touch with trusted contractors who can help you with your development.
Get the Help You Need With Bridging Finance Solutions
With this guide, you should now have a clearer understanding of how to obtain first-time development finance and what you need to do for your application to be considered. Working with the right lender can ensure that your project stays on track and reaches completion.
At Bridging Finance Solutions, we understand the struggles of trying to start your first development and the importance of securing finance.
Run out of cash on your development, need a quick cash injection for your project or want to learn more about our development finance? Get in touch with us today.
Make it happen with BFS.
