Bridging finance and development finance are often confused as one and the same thing.
But despite the fact that both represent viable funding options for property development projects, there are differences between them that must be taken into account.
Before applying for development finance or a commercial bridging loan for any purpose, here is what you need to know about these two alternative funding options:
When is Bridging Finance Used?
In most instances, commercial bridging loans are used in time critical situations where deadlines are tight. Funds raised via bridging finance can often be accessed within a matter of days, making it great for covering urgent expenses and completing projects as quickly as possible.
Bridging finance is therefore considered the ideal option in such situations as:
- Purchasing properties below market value at auction
- Quickly renovating and improving properties before selling
- Raising funds to cover urgent business expenses.
In short, bridging finance is ideal in any situation where the applicant needs to access the money in the shortest possible time.
When is Development Finance Used?
One of the biggest differences with development finance is the way in which the funds raised must be used exclusively for property development purposes. There are no upper-limits with regard to how much can be borrowed, though the application and subsequent release of funds isn’t quite as quick as with a commercial bridging loan:
Development finance is therefore considered a suitable option in the following scenarios:
- When planning or in the midst of a major construction project
- To cover construction and development costs in part or in full
- When repurposing or extending existing property developments
Whereas a bridging loan can be used for almost any legal purpose whatsoever, development finance is designed exclusively for established developers working on construction and property development projects.
Loan Terms and Release of Funds
Another key difference lies in the way the funds are released with these two funding options. With a bridging loan, the funds are released in full just as soon as the application has been approved, often being transferred into the bank account of the applicant within a matter of days.
With development finance, specialist providers usually release the funds in instalments, in accordance with the requirements of various stages of the project. Once any given stage has been completed and signed off by a surveyor, the next stage begins, and the subsequent instalment is released.
Bridging loans and development finance can both be flexible in terms of loan duration, though bridging finance will almost always be repaid sooner. The average life of a bridging loan is typically no more than 6 to 18 months, whereas a development finance agreement could continue for several years.
Talk to a Broker…
As there will always be instances where both commercial bridging finance and development finance are viable options, it is important to consult with a broker before deciding which way to go. By comparing all available options from specialist lenders across the country, you will find yourself in a much better position to make an informed decision on the ideal funding option for your project.
Contact a member of the team at UK Property Finance anytime for an obligation-free initial consultation.
