Commercial Property Development Finance

Business owners and developers may need to raise capital to help fund a new property development or renovate an old property. A commercial development finance loan could be a suitable option for raising that capital.

Here, we explore these loans in detail by identifying what types of development they can fund, eligibility requirements, and how to access such a loan in the first place. We also examine some alternative options should this form of financing not be suitable for you.

What is commercial development finance?

It’s a form of financing that can be used to purchase, renovate or develop a commercial property. These loans are usually extended for a short term only and ordinarily on an interest-only basis. To pay back the principal amount, applicants need to have outlined a clear exit strategy to the lender.

Typically, commercial property development finance is not as long an application process as a commercial mortgage. That can be a crucial difference for developers who may need to access funding more quickly. They are usually shorter in length too – maybe for as little as three months up to around three years.

Another key characteristic of commercial development loans is that you can access funds in stages. You can therefore minimise your interest repayments by only borrowing funds when you need them.

Types of development it could fund

These types of loans are used in a wide range of developments. Lenders often have a flexible approach to what type of development they accept, which can be for residential projects and commercial premises – or a mixture of the two. This is far from an exhaustive list, but here are some examples:

• Office and/or apartment buildings
• Schools
• Sports stadium
• Hotels
• Restaurants and pubs
• Shops or shopping centres
• Warehouses
• Healthcare facilities
• Residential projects, such as a housing estate or block of flats

Eligibility

Your eligibility for a commercial development loan will vary from provider to provider. For the most part, lenders will look at the following factors to evaluate your suitability:

Exit strategy

You will need an exit strategy to be considered for this type of loan. That means your provider will want to see how you intend to repay the loan, once the development work or property purchase has been completed. For example, it could be that you intend to refinance or sell the property.

Deposit size

As with a residential property, the higher your deposit, the more favourably a lender will look at your application. For commercial development, providers like to see at least 25% as a downpayment. However, some may be happy to accept less if the rest of your application is strong. It could be that if you can offer enough security to a lender (such as a joint venture agreement), they will extend a 100% loan.

Credit rating

As with any loan, your credit score can have a bearing on being approved. If you have a poor credit rating, you could still be able to find providers that will extend you a loan, but it may be for a lower amount and with less preferential rates.

With commercial development finance, lenders tend to have more flexibility when it comes to accepting applicants with bad credit. A history of adverse credit is usually only a deal-breaker if it puts the exit strategy in doubt.

Past experience

While it is possible to get a commercial finance loan with no development history, a strong track record can boost your chances of success. A gleaming CV gives providers confidence that extending a loan to you is low risk, and you have the knowledge to make your venture a viable business proposition.

Given that the above eligibility criteria can vary so much from provider to provider, seeking the advice of an expert broker can be advantageous. They’ll know which providers you meet the criteria for and how to improve your chances of a successful application.

How to get a commercial development finance loan

There are several steps that you can take to help get your application for commercial development finance off on the best foot.

Step 1. Get your documentation in order.

If you need to access funds quickly for a business proposition, saving time wherever you can is paramount. Getting your paperwork in order well in advance can help make your application easier. So, collate all the necessary bank statements, proof of addresses, business accounts and any other supporting documents that your future provider may need – like a portfolio of your previous projects.

Step 2. Draw up a business plan

For your application to be attractive, lenders have to see a viable business plan that has the potential to be successful. If you draw up your plan in advance, you’ll have it ready to submit with your application. As part of your wider business plan, lenders will want to know the following:

• how much the land or building costs,
• how much the construction and development costs will be,
• your associated business costs like insurance or other professional fees,
• your exit strategy

Step 3. Talk to an expert commercial finance broker.

Finally, seeking advice from an expert can be an invaluable resource. Enlisting a development finance broker to help you means you can save time, money and stress throughout your application process. They know the best providers to approach depending on your own specific circumstances and your own loan requirements. They can improve your application’s chances and maximise loan amounts while reducing the rates you are offered.

Things to consider

Before making an application for commercial development finance, you need to be sure that it’s right for you. While this type of loan may provide relatively quick access to funds, the following factors may have a big impact on whether it is appropriate for your needs:

Loan amounts

Commercial development loans usually start at around £250,000. If you want to borrow less than that, you may find another form of funding that is more suitable for your needs. For example, if you are not looking to borrow under £25,000, you could look into a business loan.

Term lengths

The longer the loan, the more you will pay in interest, but your development may be under less pressure to meet tight deadlines. There will be a balance for you to get right as the shorter the loan, the more quickly you have to turn your project around – yet the lower your interest costs.

Associated costs

While commercial development loans only require you to keep up with interest repayments until you implement your exit strategy, there are other associated costs to consider. For example, these loans usually attract an arrangement fee and an exit fee – both of which can be around 1-2% of the total cost of the loan.

Alternative options

If you conclude that a commercial development finance loan is not right for you, or you do not think you’d meet the eligibility criteria, here are some other options:

Commercial mortgages

These types of mortgages are sometimes referred to as business mortgages. You can use them to purchase a commercial property you intend to let out to another company. You’ll need to meet the affordability assessment requirements, including whether the rental income will more than cover the interest repayments. If a property you wish to buy has mixed-use spaces, you could access a semi-commercial mortgage to fund the purchase. Commercial mortgages range in length from 3 to 30 years usually.

Bridging loans

There are many similarities between bridging loans and commercial development financing. The idea behind a bridging loan is to help you meet the costs you incur before selling a property. Bridging loans are short term – often only around a year or less and will again require a suitable exit strategy.

Mezzanine finance

Mezzanine finance could be an option for larger development projects if you need to top up your funds to help cover costs. It’s designed to help you finish your project for which you may originally have needed a commercial development loan too.

Joint venture property development finance

If a lender is not keen to extend you commercial development finance outright, they may be happier to enter into a joint venture with you. Doing so means that while you gain access to the funds you need, the lender will also take a share in any profits made from the project.

Remortgage

If you already have a mortgage on a property you want to develop, you could look into remortgaging it to release equity. Those funds can then be used to carry out necessary works.

The types of financing available to commercial developers can be overwhelming. This is where a specialised broker can come in very handy. They know this complex part of the market well, and their experience will help direct you to the right form for you.

Speak to an expert commercial finance advisor today

Applying for a commercial development loan can be a complicated task. The range of providers available, and their varying eligibility criteria, can be a minefield to navigate on your own.

Talking to one of the development finance brokers we work with can be extremely beneficial as they can help you at every stage of your search and application. They will know which providers you should approach to give you the best chance possible for a successful application – for the amount you need and at a rate you can afford.

Our broker matching service is free of charge, and there is no obligation for you to use the expert we find for you. Call 0808 189 0463 or make an enquiry so we can put you in touch with a commercial development finance specialist today.