Development finance or bridging loans for funding construction projects
Residential or commercial new build projects can be financed in a number of different ways. It is surprisingly easy to fund a new development when the land is already owned by the developer. This is particularly so for people who have managed to obtain planning permission on land that they already own. A good example of this would be a section of land that is part of the site shared by the current family home.
The planning permission considerable increases the value of the land making it a useful asset that can be used to secure finance in order to build. Building a residential or commercial property from scratch will normally require a short term finance facility. Once the building work has been completed then the developer will usually either sell the property or keep it to rent out. If the plan is to sell the property upon completion then the developer will need short term finance to fund the construction of the new building and then repay the finance once he has sold the development. Alternatively if the property is to be rented then a long term finance option will be required in order to repay the short term facility.
Long term finance facilities do not provide suitable options for funding developments, and the short term finance options that do provide development funding are not suitable as long term finance options because their interest rates are higher than the long term alternatives.
New builds are usually funded through the use of bridging loans or development finance. These short term facilities are usually popular as a means of funding building projects because they are not concerned about the type of security being offered or its condition. Development finance is designed for funding new construction projects and can release funds in stages as money is required. The advantage of this is that it keeps interest charges down and also it enables developers to set up borrowing facilities based on the anticipated end valve of a project (GDV). Funds can then be released as different build stages are completed, because as the building work progresses the value of the site should also be increasing.
This would be more difficult to achieve with a bridging loan, since the initial advance would be based on the value of the land at the time of valuation. Development finance is a much more specialist method of financing building projects.