Development finance loans can make a fundamental difference to the process of renovating for property developers, helping to provide cash flow so that the work can be completed in the most efficient way possible, without having to worry about how the project will be financed, also helping to reduce potential stress.
However, if it is the very first time that you have applied for development finance, you may well be wondering as to how the funds are transferred, and how the overall process works.
In this guide, we will explain in detail exactly how the funds are transferred in different stages over the course of a building project.
Why is development finance given in stages?
It is important to remember that development finance loans are always released in stages through a number of payments. This is because development finance lenders want to ensure that the loan given is proportionate to the value of the work being carried out.
It is also to make sure that the loan is being used under the conditions initially agreed on by the two parties concerned.
Securing the purchase
The first stage of development finance funding will typically involve securing the site. The lender will usually provide an agreed set amount upfront, so that you the buyer are able to complete the purchase of a property.
Whilst the exact amount that is provided upfront will often be dependent on the development finance product that you choose, you can usually expect this to be somewhere in the region of 40% to 50% of the current valuation of the site.
From this aforementioned figure, charges and interest will be deducted, which will then leave you with the net development finance loan.
Payments in stages
Throughout the course of the build, payments will be released in stages by the lender. This is to help you to continue working on the building project. Payments are released once the current work has been signed off by a monitoring surveyor.
The surveyor in question is instructed by the development finance lender to manage the site and work, in order to ensure that everything is on track with the project.
Typically, the monitoring surveyor will carry out checks to ensure payments are released.These include checking that the work has been completed and meeting the terms and conditions of the loan itself.
This includes abiding by the agreed upon build schedule, as well as cost management and ensuring that the quality of the work carried out is to a high standard.
If the monitoring surveyor finds any discrepancies during the building project, compared to the agreed upon plan, then it is possible that the stage payments for development finance could be delayed.
Cash flow management
One of the great things about development finance is that it enables you to keep the cash flowing throughout a building project. Make sure that you follow the work schedule, as well as keeping a cash flow forecast to ensure the project runs smoothly.
Accuracy of building schedule
When it comes to development finance and cash flow, it is extremely important that your costings and build schedule is accurate in order to keep everything on track.
This is important, as whilst lenders will usually be happy to release equal amounts each month, you could find some months more expensive than others.