Bridging finance and specialist development finance are two of the most popular funding solutions available for property development and construction projects. They share several similar characteristics, in that they are both issued strictly as short-term loans, and can be arranged at short notice.
But while bridging finance and development finance can be used to fund similar initiatives, there are important differences between the two products.
What is Bridging Finance?
Bridging loans are short-term funding solutions that can be used for any legal purpose. They are secured against assets of value (typically property) in the same way as a conventional mortgage, typically at a maximum LTV of around 80%. Bridging finance can be taken out by individuals and businesses alike and in most cases is repaid within 12 months.
The funds raised with bridging finance can often be accessed within a few working days and the money is transferred to the borrower in a single lump-sum payment. After which, interest accrues on a monthly basis (often as low as 0.5%) and the full balance is likewise repaid in a single lump-sum transfer.
Eligibility requirements for bridging finance are fairly relaxed and lenders are often willing to work with poor credit (subprime) applicants. Just as long as you have sufficient assets of value to cover the costs of the loan and evidence of a workable exit strategy (how the loan will be repaid), you have every chance of qualifying for bridging finance.
Property investments and development projects are popular applications for bridging finance, but a bridging loan can be used for any legal purpose with no specific restrictions.
What is Development Finance?
Development finance works in a similar way to bridging finance, but with more restrictions. For example, development finance loans are issued exclusively for property development, investment and construction projects. Unlike bridging finance, you cannot take out a development finance loan for anything other than property development purposes.
In addition, most development finance specialists offer their products and services exclusively to established developers and construction companies. This means that you will need to provide evidence of relevant experience in the field, in order to qualify for a development finance loan. It can also be comparatively difficult to qualify for development finance with poor credit, or a history of insolvency.
While development finance can often be arranged just as quickly as bridging finance, the full balance of the loan is not transferred to the borrower right away. Instead, it is issued as a series of instalments, tied to the completion of major phases of the project. A development finance loan may have a term of up to three years, but most are repaid within 12 months.
In return, established developers can often benefit from interest rates and overall borrowing costs that are lower than those of a comparable bridging loan. The more experience a developer has and the larger their portfolio of successfully completed projects, the higher their likelihood of being offered an unbeatable deal.
So while development finance may be more restrictive than bridging finance, it can be the more affordable of the two products for some types of projects.
Making the Right Choice.
If unsure which funding solution is most appropriate for your requirements, consulting with an independent broker comes highly recommended. Your broker will help determine which of the products available is right for you, while negotiating on your behalf to ensure you get an unbeatable deal.