Commercial Development Finance Loans

If you're a developer looking to secure funds for a building project, read on to see how you can qualify for commercial development finance.

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Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Updated: November 16, 2023

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 what commercial development finance is 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 and 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:

  • Retail units
  • Industrial units
  • Hospitality venues
  • Schools and colleges
  • Care homes
  • Offices
  • Churches
  • Residential properties to sell or let

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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 so far.

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 not earning them any interest.

But it is very much 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 prior to 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 on a case-by-case basis 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:

Write a robust business plan

The success of your application is heavily dependent on the strength of your business plan as this is what will show potential lenders that their investment is sound. You will need to include all costs and a schedule of work to demonstrate that your business plan is robust.

Additional costs include:

  • Arrangement fee
  • Exit fee
  • Valuation fee
  • Legal fees
  • Non-utilisation fee

A track record of success with similar projects will stand you in good stead. First-time developers will have a smaller pool of lenders to choose from but with a strong business plan there is no reason you can’t secure a competitive deal. Sometimes, partnering with a more experienced developer can strengthen your application.

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Deposit requirements

There are two elements to the finance required for commercial development projects – 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%.

It is possible to get commercial development finance at 100% loan to value (LTV) 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 will be able to 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 a wide variety of lenders, including some high street banks.

However, each has their 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 the nuances of a particular project compared with another similar one means 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, if you’re looking to buy land, renovate a derelict building or make substantial changes to an existing building, development finance is required.

Commercial development finance is uniquely designed to be released in stages and cover the costs of the development so 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 but where the funds are released to borrowers in one hit.
  • Mezzanine finance: Usually used to top-up funds midway through the project and overcome a shortfall in finances.
  • Joint venture property development finance: With some lenders, it’s possible 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 is the strength of your business proposal – and exit strategy – to the lender. Some lenders may consider an apartment complex as 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 who specialise 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 then pair you up with a broker who has a track record of helping people just like you to secure the best deal on commercial development finance.

To get matched with your ideal broker, call today on 0808 189 2301 or enquire online.

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FAQs

Not necessarily. A clean credit record will be more favourable to lenders, but acceptance is based more on the strength of your business proposal. If the project looks solid, there is no reason for it to be rejected simply because of your credit history, unless your adverse puts the exit strategy as serious risk.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

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Pete Mugleston

Mortgage Advisor, MD

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