Commercial Development Finance Loans

Commercial development finance is often the best choice for developers looking to secure funds for a substantial renovation or new building project for commercial premises.

In this article, we’ll explain commercial development finance and how it works. We’ll also look at the alternatives and why speaking to a broker who specialises in this niche is always recommended to make the most profitable decision.

What is commercial development finance?

Commercial development finance is a short-term borrowing solution available to individuals, companies, LLPs, non-profits and pension funds. It can be used to fund the purchase of property or land and building costs for almost any viable commercial building or renovation project, including:

How does it work?

It provides funds to get a development project off the ground, with finance released in stages. This can be on a timed basis (i.e. once a quarter) or when certain aspects of the project are completed and more capital is required.

Often, it’s a cost-effective way to fund a development project as interest is calculated daily based only on the funds you have borrowed.

Be sure to check your documents carefully, though. Some lenders charge a non-utilisation fee that compensates them for funds not yet drawn down and, therefore, does not earn them any interest.

However, it is a short-term borrowing solution, and providers must see a clear exit plan before agreeing to release funds. This could be to sell or refinance onto a commercial mortgage.

Lenders in the business sector will want to assess the site before agreeing to the deal and releasing each tranche. And you will need to pay a fee each time they do. So, whether this is your best option will depend on the precise details of your project.

How is interest paid?

Typically, interest is rolled up and added to the loan when you settle it, so there are no monthly repayments. Rates are determined case-by-case, and some commercial lenders are open to negotiation.

How to get development finance for a commercial project

Follow these steps to give your application the best chance of being approved:

Deposit requirements

The finance required for commercial development projects consists of two elements: the purchase funds and the building costs.

Most providers will lend up to 75% of the purchase price, so you will usually need a deposit of around 25%.

Getting commercial development finance at 100% loan to value (LTV) is possible, but this will require securing assets against the loan. This could be property or equipment, the exact nature of which would need to be discussed with your lender.

Typically, you can borrow between 60% and 100% of the building costs, depending on the strength of your business plan and ability to negotiate.

Which lenders offer this type of finance?

Commercial development finance is available from various lenders, including some high-street banks.

However, each has its own unique way of assessing applications. High street banks tend to be more flexible with this type of lending than they are when assessing a standard residential mortgage, but they are typically more risk-averse than specialist providers.

There is no single answer to which lender is best for commercial development finance, as it will depend entirely on the details of each project. Even a seasoned developer may find that the nuances of a particular project compared with another similar one mean a different lender is better suited.

This is why it’s best to seek professional advice.

Could you use a business loan instead?

A business loan might be more suitable for a small development project with a budget of up to £25,000. You would not need to provide security for a business loan.

However, development finance is required if you’re looking to buy land, renovate a derelict building, or make substantial changes to an existing building.

Commercial development finance is uniquely designed to be released in stages and cover the development costs, so it is often the preferred option for projects of this nature.

Frequently, commercial development finance is taken out to start a project and the loan is then refinanced into a commercial mortgage once the building is in a condition more widely acceptable to lenders.

Other alternatives to consider

Other borrowing options to be considered depending on the nature of your project include:

• Bridging finance: A short-term loan similar to commercial development finance, in which the funds are released to borrowers in one hit.
• Mezzanine finance: Usually used to top-up funds midway through the project and overcome a financial shortfall.
• Joint venture property development finance: Some lenders allow you to arrange a profit share agreement to secure 100% of the required funds. This requires no deposit, but interest rates are higher, and lenders typically expect around 40% and 50% of the profits.

Can you use commercial development finance for an apartment building?

Yes, it’s possible. As outlined above, what matters the most to the lender is the strength of your business proposal and exit strategy. Some lenders may consider an apartment complex a higher risk; therefore, the rates charged could be slightly higher, but your broker will be able to identify those who may specialise in these types of projects.

Get matched with a commercial development finance specialist

We work with brokers specialising in commercial development finance and can help you secure the best deal. Their deep knowledge and industry contacts will enable them to identify the most appropriate lender and negotiate on your behalf.

Our unique broker-matching service will quickly assess your circumstances and match you with a broker who has a track record of helping people like you secure the best deal on commercial development finance.

To get matched with your ideal broker, call today on 0330 818 7026 or enquire online.