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Categories: guides | development finance | development finance guides
Choosing the right development finance lender is a critical decision that can significantly impact your ability to secure the right amount and type of funding for your ground-up build.
With many options available in the market, selecting the most suitable lender requires careful consideration of various factors, from interest rates and terms to the lender's reputation and industry expertise.
In this guide, we look into key considerations and strategies to help you in picking the right development finance lender, and maximise your application’s chance of approval – so you can get on with turning your project into a reality.
The two approaches development finance lenders take when lending
When choosing who to lend to, development finance lenders will typically belong to one of two camps.
- High street lenders that look for projects that are typically being completed by experienced borrowers, have a smaller gross development value and loan sizes in keeping with developments they have completed before.
- Specialist and challenger banks that look for projects with higher gross development value (GDV) and higher loan sizes, due to the greater income they can achieve, albeit they come with more risk.
With the latter, rigorous due diligence becomes the base of this strategy, ensuring an iron-clad evaluation process to guarantee the security of the funds lent.
By understanding that a given group of lenders may prefer some types of project over others, and approaching the more suitable lenders for your project, you can increase the likelihood your application gets approved.
A specialist broker like Commercial Trust will have all this background knowledge. We will discuss your project in detail with you, so we have all the information needed to do our lender and product research.
Having gathered this information, we will know where to start in finding you a deal. Your advisor can discuss the details of your scenario with the closest matching lenders, to refine that selection down to one product.
Some brokers might present you with a choice of deals that you can choose from, but at Commercial Trust we don’t do this. The quality of our service means that we identify the most competitive deal we can for you, meaning all you have to do is review the product to make sure you are happy with it.
The risk-averse lenders
High street banks are usually more risk-averse lenders. Meaning they prefer projects which are fairly common place (e.g. commercial units like a shop or office, or conventional flats or houses), regardless of whether the project is residential or commercial.
High street development finance lenders will typically prefer an applicant that has a good track record with property development, as experienced developers typically come with less risk.
The flexible lenders
Some development finance lenders, specifically specialist lenders and challenger banks, prefer larger, more profitable projects within the development landscape, whilst accepting they come with more risk.
They can and do go for smaller projects but these will likely be completed by the lender’s bridging team
Unlike more risk-averse high street lenders, these institutions specialise in funding ventures that carry higher levels of uncertainty and complexity, such as large-scale infrastructure developments, real estate projects, and innovative endeavours, because the income they can achieve from the interest on larger loan amounts has a significant commercial benefit.
In essence, specialist lenders and challenger banks play a crucial role in supporting ambitious initiatives that may be deemed too challenging or unconventional by high-street banks.
Ask these questions about your development project
Before you pursue financing for your project, answer these two questions regarding your development project. This will give you an idea on where to go for funding options.
- How much are you looking to borrow?
- How much property development experience do you have?
How much are you looking to borrow?
When planning a project, one of the key decisions you'll face is determining the amount of finance needed to bring your vision to life. Different property development finance lenders specialise in varying loan sizes, and understanding your project's financial scope is vital to finding the right lenders.
Small-scale projects
For developers undertaking small-scale projects, such as renovations as opposed to ground-up builds, a bridging loan is more appropriate.
Smaller property developments that involve one or at most a few units will have less financing options available to them, as there are less development finance lenders who will lend to smaller projects. While they are certainly out there, just be aware that as the development project increases in GDV, so does the options in financing.
Do bear in mind though that if you are looking for first time developer finance, your lack of experience brings more risk back into the scenario. So, even if you do have a small project, the rates will be a little higher the first time around.
Irrespective of this, starting on a small project is the best route to go down, because a larger or more complex build increases the risk further and it will be far less likely a lender will be comfortable issuing a loan.
Large-scale and complex developments
For ambitious projects demanding substantial financial backing, specialist development finance lenders will typically be the best option for you.
These entities are equipped to handle large-scale developments, offering a range of financial products and expertise in dealing with complex funding structures. This choice ensures that your unique needs are met by professionals experienced in navigating intricate financial landscapes.
How much property development experience do you have?
Navigating the world of property development finance isn't just about the cost of your project—it's also about the level of experience you bring to the table.
Borrowing options will open up if you have experience as a developer and can demonstrate a track record and expertise.
How to increase your financing options as a property developer
As a property developer, there are typically two ways to progress, to achieve and complete those high gross development value projects.
The first is through completing developments that naturally increase in size and scope. Perhaps you’ve completed your first ground-up property, and so your next project is two properties.
A development finance lender will be happy to take the risk funding a property developer if the project they will fund is ‘around the upper bounds’ of the borrowers experience; if you’ve completed a 5 unit build, they may fund you for a 7 unit build, but unlikely to fund you for a shopping centre complex.
By always slightly increasing the scope and size of your developments, the financing options available to you will increase, this will take time whilst you scale up the size of your projects.
However, there is another way for those short on time. If you want to expedite the process, there is another, albeit less common, route. By partnering with an investor that has the vital experience, a development lender will be more likely to fund your project.
Get the lending you need
Commercial Trust is a development finance brokerage, offering access to a network of UK lenders.
If you're in the process of securing financing for a conversion project, reach out to us today. Submit an enquiry or simply call us to get talking with one of our experienced advisors.
FAQs
There are a large number of lenders who offer development finance, which include high street banks and specialist lenders.
Each lender has various criteria, or rules, around the type of project they will lend on. Using a broker to find a suitable lender is a great option, see “How do I get development finance” below.
It is possible to approach some (not all) development finance lenders directly as a consumer, however, there are a lot of them, and each one can only advise you on their own products. This means a lender cannot tell you if their development finance products offer you the best possible deal you can secure.
There are a number of reasons why using a broker to find a lender is a good idea.
Finding the right product: with so many lenders and products available it is a huge job to check all criteria to find the right option and the best price in combination.
Getting the best price: some development lenders will only accept applications made through an intermediary (e.g. a broker), so if you try to find a deal yourself, you may miss an opportunity that offers you the best outcome.
Enjoying an efficient and stress-free service: a broker will take a lot of the hassle and stress away from you. They work with development finance lenders every day and can quickly and efficiently identify a product that you can apply for.
High success rate: with the knowledge and experience of a broker assessing your needs and circumstances, you are far more likely to have your case accepted by a lender.
Brokers may charge a fee, but you may find the benefits far outweigh this cost. For help, contact our development finance advisors.
