Whether constructing new homes, converting commercial spaces, or refurbishing existing structures, developers often need financial support beyond personal funds.
Development finance plays a crucial role in bridging this gap, providing tailored short-term loans to cover land acquisition and construction costs.
Development finance is a type of short-term funding designed specifically for building and property projects that are still in progress.
Unlike traditional property loans, which are secured against completed buildings and repaid over usually decades, development finance is structured for projects still in progress.
In this guide, we’ll cover how development finance works and everything you need to know to maximise profits and efficiently manage cash flow throughout the construction process.
Table of Contents
- What Is Development Finance?
- How Does Development Finance Work?
- Example of A Development Finance
- Types of Development Finance
- Eligibility Criteria for Development Finance
- Can First-Time Developers Get Financing?
- Exit Strategies for Development Finance
- What Is Planning Permission In Development Finance?
- Frequently Asked Questions (FAQs)
What Is Development Finance?
Development finance is a short-term funding solution designed specifically for property development projects.
It provides developers with the necessary capital to purchase land, fund construction, and cover associated costs until the project is completed and either sold or refinanced.
A key feature of development finance is its staged drawdown structure. Instead of receiving the full loan amount upfront, developers access funds in phases based on project progress in most circumstances.
Lenders assess viability by considering factors such as planning permissions, cost estimates, and market demand.
Unlike standard mortgages, which are long-term loans secured against existing properties, development finance is structured around the projected value of the completed project.
Another major difference is repayment – interest is typically rolled up and paid at the end of the term, allowing developers to focus on construction without immediate financial pressure.
How Does Development Finance Work?
Development finance is a type of funding designed specifically for building and property projects that are still in progress. Here’s how it works in simple terms:
Lender Assessment
When a developer applies for development finance, the lender reviews the project very carefully. They look at the project’s feasibility (how realistic the project is), the developer’s past experience, and whether the finished property is likely to be profitable.
The developer must provide detailed plans, including planning permissions, construction cost estimates, and a clear exit strategy (how they plan to repay the loan, for example by selling the property).
The lender will also check the developer’s credit history, overall financial health and previous experience.
Loan Structure & Repayments
Unlike a traditional loan, which is given in full upfront, development finance is released in stages as the project moves forward. For example, the first amount might be used to purchase the land.
As the building work progresses, additional funds are released after the lender confirms that the work is being done as planned—often through site inspections by experts such as quantity surveyors.
Instead of making regular repayments during construction, the loan is usually repaid when the project is completed, either by selling the property or by switching to a long-term mortgage. Interest on the loan often accumulates and is added to the total loan amount to be paid later.
Key Approval Factors
Lenders use two important ratios to decide on a loan:
Loan-to-Cost (LTC): This is the percentage of the total project cost that the loan will cover, which is typically up to 90%.
Loan-to-Gross Development Value (LTGDV): This compares the loan amount to the estimated value of the completed project, usually set at around 65-75%.
These ratios help determine how much of the project’s cost the developer must cover themselves with their own money.
Example of A Development Finance
Imagine you want to develop a small housing project that costs £1 million in total. The lender might agree to fund up to 90% of the costs (£900,000) under LTC guidelines.
If the finished project is expected to be worth £1.5 million, LTGDV rules may allow the lender to provide up to 70% of that value, which is about £1.05 million.
In practice, you might receive the money in stages – first for buying the land, then for construction after inspections – and repay the loan when the project is complete through a sale or refinancing.
Types of Development Finance
1. Residential Development Finance
Residential development finance is designed for projects involving the construction of new homes or major refurbishments of existing residential properties.
Developers use this funding to build single-unit homes, apartment complexes, or housing estates.
The loan is typically structured as short-term funding, with staged drawdowns throughout the construction phase. Repayment occurs once the properties are sold or refinanced into long-term mortgages.
2. Commercial Development Finance
Commercial development finance supports projects such as office buildings, retail spaces, hotels, and mixed-use developments.
Lenders assess the project’s viability based on expected rental yields, pre-let agreements, and market demand.
Given the higher risks associated with commercial properties, interest rates tend to be higher, and loan terms may include stricter repayment conditions.
3. Refurbishment & Conversion Finance
For developers looking to renovate or repurpose existing properties, refurbishment and conversion finance provides the necessary capital.
This type of funding is ideal for transforming old buildings into modern living spaces, converting offices into apartments, or upgrading properties to meet new regulations.
Loans may cover both light refurbishments, such as cosmetic updates, and heavy conversions requiring structural changes.
4. Development Exit Finance
Development exit finance provides short-term funding for developers who have completed a project but have not yet sold all units or secured long-term refinancing.
It enables them to repay the original development loan while waiting for property sales to materialise. This option can reduce overall interest costs and offer greater flexibility in managing cash flow.
5. 100% Development Finance
For developers who lack sufficient capital, 100% development finance offers a solution by funding the entire project cost.
This often involves joint venture agreements with lenders or additional collateral, such as other property assets.
While it minimises upfront investment, developers must be prepared for profit-sharing arrangements or higher borrowing costs.
Eligibility Criteria for Development Finance
1. Developer Experience and Track Record
Lenders prioritise experienced developers with a proven track record of successful projects.
A strong portfolio demonstrating expertise in planning, construction, and sales increases the likelihood of securing funding.
Developers with little or no experience may need to partner with seasoned professionals or provide additional security to reassure lenders.
2. Project Feasibility and Risk Assessment
Lenders conduct thorough due diligence to assess a project’s feasibility.
This includes reviewing financial projections, construction timelines, and potential risks such as cost overruns, supply chain delays, or market downturns.
A well-prepared business plan outlining risk mitigation strategies can improve the chances of approval.
3. Planning Permission and Regulatory Approvals
A key requirement for development finance is securing the necessary planning permissions. Lenders will rarely approve funding for projects without formal approval from local authorities.
Developers must also comply with building regulations, environmental laws, and zoning restrictions to avoid delays or legal issues.
4. Exit Strategy and Repayment Plan
A clear exit strategy is essential in securing development finance. Lenders need assurance that the loan will be repaid through property sales, long-term refinancing, or rental income.
A well-defined repayment plan, supported by market research and sales projections, can strengthen an application.
Can First-Time Developers Get Financing?
While experience is a major factor, first-time developers can still access development finance.
To improve their chances, they may need to provide a higher deposit, collaborate with experienced professionals, or secure additional guarantees.
Some lenders specialise in funding new developers, but interest rates and lending terms may be less favourable compared to those offered to experienced applicants.
Exit Strategies for Development Finance
A well-planned exit strategy is essential for repaying development finance and maximising returns.
One common approach is selling the completed project, using profits to repay the loan. This is ideal for developments in high-demand areas, though market conditions can affect sales speed and pricing.
Alternatively, developers may refinance onto a long-term mortgage, allowing them to retain the property and generate rental income.
This works well for buy-to-let and commercial projects, but requires rental yields sufficient to cover loan repayments.
Another option is development exit finance, a short-term loan that bridges the gap between project completion and sale or refinancing.
These loans typically have lower interest rates than development finance, reducing costs while providing extra time to secure buyers or tenants.
Choosing the right exit strategy depends on market conditions, financial goals, and project feasibility, ensuring a smooth transition from development to profit realisation.
What Is Planning Permission In Development Finance?
Planning permission is a formal approval process required for many development projects. It is needed if you plan to build something new, extend an existing building, or change its use.
To secure permission, you must contact your local planning authority through your council.
Without planning permission, any work undertaken could lead to an enforcement notice requiring you to undo the changes made.
Planning permission is also crucial for securing development finance, as it assures lenders that a project can proceed without legal issues. Most lenders require full planning permission before approving funding, as it reduces risk.
Outline permission may be accepted but often comes with stricter terms. Full consent covers all project aspects, while outline consent only grants approval in principle.
Planning restrictions, such as land-use constraints or environmental regulations, can impact financing options.
This requirement applies across different regions, including Scotland, Wales, and Northern Ireland, so please contact your local planning authority (LPA) through your local council.
Frequently Asked Questions (FAQs)
1. How long does it take to get a development loan?
The approval process for development finance varies depending on the lender, the complexity of the project, and the availability of required documents. On average, it takes 4 to 8 weeks from application to fund release.
The process includes initial inquiries, due diligence, valuation, legal checks, and final approval. Developers who prepare detailed project plans and financial documents in advance can speed up the process.
2. Can I get development finance with bad credit?
While bad credit can make securing finance more difficult, it is still possible. Specialist lenders may consider applications from developers with adverse credit histories, focusing more on project viability, experience, and exit strategy rather than credit scores alone.
However, bad credit may lead to higher interest rates, lower loan amounts, or stricter lending conditions. Providing additional security or involving an experienced partner can improve approval chances.
3. Do lenders require personal guarantees?
Most development finance lenders require personal guarantees, particularly for smaller developers or first-time applicants. This means the borrower is personally liable if the project fails or the loan is not repaid.
However, experienced developers with a strong track record or those using limited company structures may be able to negotiate reduced personal guarantee requirements. Some lenders accept alternative security, such as additional property assets.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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