When it comes to property development, finance is the kingpin of the entire project. Planning, skilled personnel, and the necessary materials are all vital to a development project, but nothing gets done without the appropriate funding. As such, to maximise your chances of success and profit, you need to obtain the method of finance that best suits your situation.

The best form of finance depends on the specifics of your particular project. For example, a small project with various expenses and potential costs would benefit more from a small, flexible form of finance, rather than something large, such as a mortgage. Despite the wide variety of loans, finding the best solution can be difficult. It’s easy to be paralysed by the sheer amount of choice, with each option boasting its pros and cons. However, one form of finance has proved itself to be exceptionally useful and reliable in the property development industry – bridging loans.

Bridging loans are an option many property developers have used to great effect. They are fast, flexible, and can raise large sums of money. For these reasons, bridging loans have more than found their place in the property development industry. With that said, how can a budding property developer use a bridging loan for property development? In this article, we will answer this question, provide an overview of how bridging loans function, and how they can benefit you. Let’s get started.

What is a bridging loan?

Bridging loans are a short-term form of finance that specialise in providing borrowers with large sums of capital in short spaces of time. It is not uncommon for a bridging loan to last only a month or two, and very few exceed 12 months. Bridging loans are classified as secured loans, meaning they require the use of collateral to secure the loan. This collateral can be a wide variety of physical assets, but they generally match the asset being purchased. For example, a bridging loan taken to purchase a property will typically be secured by another property. While this does open the borrower up to some level of risk, it is this requirement that allows bridging loans to offer their key benefits, which we will cover later.

How can a bridging loan be used for property development?

While bridging loans can be effective in a range of applications, they are especially useful in the property development industry. The main advantages of bridging loans lend themselves well to this industry, allowing property developers fast access to flexible finance, perks that are invaluable in a competitive market. Moreover, using bridging loans in property development is easy, once you know how.

Naturally, obtaining bridging finance for your next development project starts with an application. In this application, you will outline the projected profitability of your project, along with a few other key details. Assuming your application is approved, your lender will place a lien on your collateral, which will be the project itself for this example, and you will receive the funds in short order. With the money, you can make a cash offer to the property seller, and purchase whatever materials and labour you require.

Have a thorough development plan

Next comes the development itself. It pays, quite literally, to have a thorough development plan before taking out a bridging loan. Proper planning can make for a much quicker project, meaning you’ll end up paying less in interest due to decisive action. As bridging loan interest rates are fairly high, this is a good way to reduce costs somewhat. With this in mind, the development of your newly-acquired property should consider profitability and speed as its two main priorities.

Once your property is ready for sale, you can prepare to repay your bridging loan. In property development, repayment typically comes from the sale of the newly developed property. Developers will sell it off, repay the bridging loan, and hopefully have made a profit for their effort. However, this is not the only way to repay a bridging loan.

If you have secured your loan against another asset, such as a property you don’t intend to sell, then refinancing is a viable option. In this case, you could obtain a mortgage for the property, or another similar form of finance, and use it to repay your bridging loan. This is a common alternative method of repaying a bridging loan, and is appropriate for when you require a long-term solution. Note that if you do intend to use this method, sooner is better, as you will avoid paying the relatively high bridging loan interest rates.

Benefits of using a bridging loan for property development

As we have mentioned, bridging loans offer several key benefits that make them invaluable to property development. These benefits are as follows:

  • Speed – The foremost advantage offered by bridging loans is speed. Largely due to a streamlined application process, bridging loans are capable of getting from application to the release of funds in as little as a few days. This makes bridging loans perfect for competitive markets where opportunities can be fleeting, and borrowers can utilise bridging loans to beat competitors to the punch.
  • Flexibility – Bridging loans can be used to fund almost any purchase, whether it be a new home, a vehicle, or anything in between. Equally, almost any asset can be used to secure a bridging loan, provided it is valuable enough. Additionally, bridging loans have some flexibility in terms of repayment. There are multiple ways to repay the overall sum, and many lenders offer different ways to pay interest. This can make your bridging loan a little easier to repay.
  • High-value loans – Bridging loans are almost unparalleled in their ability to raise large sums of money. Borrowers have great flexibility in how much they take out, as loans can range from roughly the size of a personal loan, to in excess of £1 million. The main limiting factor is the value of a borrower’s collateral assets.

Wrapping up

All in all, not only is it possible to use a bridging loan for property development, it is a very effective choice. Bridging loans sports a series of benefits that make them perfect for the role, and many experienced property developers use them to fund their projects. However, they aren’t without their downsides, with high interest rates and higher risk than unsecured loans being two prominent drawbacks. As such, seeking professional advice is a good idea to ensure you make the best decision for your situation.