When it comes to property development, securing fast, flexible, and effective methods of raising finance is a must. It’s impossible to know when a great opportunity will appear on the market, and every moment spent raising the money required to make a purchase is a moment given to competitors. This demand for speed is one of the core reasons why bridging loans have become so popular in the property development industry. With one, borrowers gain access to substantial amounts of capital in a short space of time, enabling them to seize upon opportunities that would otherwise pass them by. However, although bridging loans are certainly incredibly effective, they are not suitable for every scenario.

Development finance offers a viable alternative for these very cases. When bridging loans aren’t enough to get the job done, property developers can turn to development finance to fill in the gaps, often by merging the two forms of finance together. That said, why exactly is development finance a good alternative?

In this article, we will discuss exactly that, breaking down both bridging loans and development finance, how they can be used, and ensuring you have the information you need to make the right decision. Let’s get started.

What is a bridging loan?

Bridging loans are an excellent means of raising finance for purchasing or developing property. They are a type of secured loan, meaning they require physical assets to be used as collateral when taking out a bridging loan. Assets can be anything from vehicles and land to equity in a property, provided they are of sufficient value for the sum being requested. As a result of this requirement, bridging loans are an exceedingly speedy form of finance, with an application turnaround of as little as two days, depending on your lender and the level of detail in your application. For bridging loans, the usual details that lead to a lengthy application process are not nearly as important.

Although this speed is a significant advantage, it does come at a cost. Namely, this cost is an increased risk for the borrower. Once a bridging loan application is approved, the lender will place a lien on assets used as collateral. This lien entitles the lender to seize these assets in the event the borrower cannot make repayments, up to the value of the loan left outstanding. While this is generally not much of an issue for financially secure borrowers, it can pose a high risk for borrowers without that same stability. As such, a certain level of caution is a good idea when considering bridging loans, and secured loans more generally.

Also Read: Where To Get a Bridging Loan

What are the applications for a bridging loan?

Bridging loans have a wide array of potential applications, both in and out of the property development industry. They can be used to great effect when purchasing almost any kind of property, whether it be a new home for a family, or a development opportunity for a property developer. The aforementioned speed and flexibility of bridging loans can facilitate a quick cash purchase without the need for a chain, making any offer made a very tempting one to a seller. This effectiveness is the same whether the property is for sale on the market or at auction.

Purchasing a property is not the only application for bridging loans. Although this is certainly one of their primary uses, bridging loans can also be used to fund the development of a property, or the construction of a new build along with the purchase of a plot of land. If something requires fast action and a hefty sum of money, bridging loans are often a good solution.

What is development finance?

Development finance is a strong alternative to bridging loans. It is an umbrella term that encompasses a series of different loans, each with the same purpose – to fund the development or construction of a property. However, as it is a broad term, exactly how development finance achieves this will vary from loan to loan. Some lenders will choose to release funding intermittently, funding each stage of a development project as it is reached. Others will choose to offer a lump sum similar to bridging loans, but may offer additional flexibility to cover unforeseen costs.

Regardless of how a particular lender intends to fund a project, how it is secured remains the same. Development finance is another form of secured finance, with loans being tied to the value of the property being developed in most instances. This often requires borrowers to have a solid estimation of the value of the property once it is finished, essentially amounting to a business plan. If a lender sees that a project has sufficient value or potential revenue, the likelihood of a successful application is high. This does constitute a similar level of risk for the borrower as with bridging loans, however.

Also Read: Is It Possible To Use a Bridging Loan For a House Purchase?

What are the applications for development finance?

There are many applications for development finance, the most common of which is the construction of a new build. Property developers will take out development finance to make the necessary purchases and cover the costs of each stage of construction, starting with the purchase of land and certain materials. Once the land and materials are obtained, the lender will release the next stage of funding for the foundation and basic structure of the property. This steady rollout of funding will continue as each stage of development is reached, with the finished product being sold off to repay the loan, or it is refinanced.

Although the construction of a property is the primary use of development finance, it is not the only application. Development finance can be used to refurbish a property in much the same fashion, with funding being released as each stage of the project is reached.

The differences between bridging loans and development finance

Although similar in some areas, bridging loans and development finance are quite different in others. First, as we have mentioned, is how funding is released. Bridging loans tend to be a simple lump sum once an application has been approved, while development finance follows a step-by-step release of funding. This has the added effect of making development finance a bit more flexible than bridging loans; depending on the needs of each stage, more or less funding can be obtained as it is needed, though this depends heavily on the reaction of a lender. That said, development finance is not as flexible in terms of applications compared to bridging loans, as they can be used for a much wider variety of purposes.

However, development finance can often be cheaper than bridging loans, depending on your specific loan. This can make it a more financially viable solution for your project, depending on its requirements.

Wrapping up

All in all, both options offer their own host of advantages, making them good methods of funding a project. However, some projects will find one more beneficial than the other, and you will need to weigh up the needs of your project with the benefits and downsides of each form of finance. In this regard, obtaining the advice of a financial professional can help you make the best decision for your situation.