When it comes to starting a property project, the type of financing you choose can have a big impact on the cost, speed and overall risk. Bridging finance and development finance are two of the most common choices and, though they can be used for similar projects, they work differently. Knowing how they are differ will help you to choose the best path for your project.
How Do Bridging Finance and Development Finance Compare?
Project Size Suitability
One of the most obvious differences between bridging loans and property development finance is the size of the project they are best for. People usually use bridging finance for renovations or smaller projects, light to medium work – for example, changing the use of a space, making cosmetic improvements or converting the space into something new – and projects that need to be done quickly. Bridging loans tend to be best if you want to buy a property for less than its market value, do some work on it and either refinance or sell it quickly. However, development finance is better for bigger developments, heavy repairs or changes to the structure, and plans that involve more than one unit.
Planning Permission Impact
Getting planning permission is a big part of figuring out which financing option is best.
Bridging loans can be used with or without planning permission, and they often pay for things when planning is still pending or being appealed. They’re also used to quickly secure a property before plans are set in stone. Development finance usually needs full planning permission before any money can be released, which includes a thorough look at approved plans, costs of building and timelines.
Price and Structure
Both bridging finance and development finance are types of lending that are only available to certain people, but they are set up in very different ways. Bridging finance tends to be short-term, with interest that is rolled up to ensure lower monthly payments. Development finance is usually aimed at those seeking long-term funding that fits with building schedules, and funds are released in stages. Interest on development finance is only charged on money that has been drawn, but the costs are higher up front.
Risk Profile
Both types of finance have a very different way of looking at risk. Bridging lenders focus on exit plans, the loan-to-value (LTV) ratio and your experience as a borrower. This means that even first time developers can get bridging finances. Development finance lenders look at risk in a different way, considering building costs, the professionals being used, demand in the market and estimated property value at the end. This means that development finance is better for developers who have been around for a while and have well-planned projects. Exit planning becomes critical once a project is underway, which is covered in more detail in our guide to development bridging loan exit strategies.
Bridging vs Development Finance: Which One Is Right for You?
- Bridging finance is best for small projects that need to be done quickly and easily.
- Development finance is meant for big, complicated projects that have full planning permission.
It’s not uncommon for developers to start with bridging finance – for example, using it to buy a site or pay for early work – and then switch to development finance once planning permission is in place and work is underway. In some cases, developers also use bridging loans to manage short term costs such as VAT during the early stages of a project.
If you don’t know which option is best for your project, getting expert advice can help you save time and money. The right financial structure at the beginning can often mean the difference between a project going smoothly and one that costs a lot of money to finish.
