Development finance is one of the more demanding forms of commercial finance to arrange. The sums involved are often larger, the lender’s due diligence is extensive, and the project itself, not just the applicant, is scrutinised. Many applications run into avoidable trouble. Here are the mistakes we see most often, and how to avoid them.
Underestimating build costs
A tight budget with no room for the unexpected is one of the quickest ways to unsettle a lender. Costs often rise during a build, so lenders want to see a realistic contingency built in from the outset, typically around 10%. A budget that leaves no room for contingency is a red flag for a lender, and it’s one of the first things an experienced lender will check.
Not having a clear exit strategy
Development finance is short-term by design, and lenders need to know exactly how it will be repaid once the project is complete. This might be through sales or a refinance onto a long-term loan once the development is let. A vague or unconfirmed exit plan is one of the most common reasons an otherwise strong application falters.
It’s worth having more than one option in mind, too, to demonstrate that you’ve thought through what happens if the first plan changes.
Applying before planning permission is secured
Lenders will want certainty over what can legally be built before committing funds. Applying too early, before permission is granted, or with conditions still outstanding, can waste time on an application that was never going to proceed as planned.
It’s also important to ensure that the details of what’s been approved match what’s intended. Permission that differs from the plan, even in small ways, can hold up an application until it’s resolved.
Overlooking the professional team
As well as assessing the developer’s track record, lenders scrutinise who’s involved in the development, including the contractor, the architect and the project manager. A strong team with relevant experience reassures a lender that the project is likely to be delivered on time and on budget.
Gaps in the team, or a team without development experience, can be enough to put a lender off, even when the numbers look sound. Lenders don’t automatically rule out first-time developers, but in these circumstances, the strength of the surrounding team is even more important.
Not planning for how drawdowns actually work
With development finance, funds are released in stages as the build progresses, typically following inspections by the lender’s monitoring surveyor, rather than as a single lump sum upfront. Failure to understand this process, or to plan cash flow around it, can catch developers out partway through a project, particularly if a stage payment is delayed.
It’s worth building some flexibility into cash flow planning to cover the gap between a stage being completed and the funds actually arriving.
Underestimating the timeframe
Builds rarely finish exactly on schedule. Weather, supply delays, planning conditions, and unexpected on-site issues can all delay a project’s completion. Because development finance is time-limited, it’s vital to build in a schedule buffer. Rushing to complete, refinance, or sell before the facility runs out is a stressful scenario.
Choosing the wrong lender for the project
Not every development finance lender suits every project. Some specialise in ground-up builds, while others focus on conversions or refurbishments. Appetite also varies widely by project size, location, sector, and experience level. Approaching the wrong lender first can waste time or result in a decline, even if the project is viable.
Getting advice too late
Many of these issues are avoidable with the right guidance from the outset, well before an application reaches a lender. A broker who regularly works with development finance can flag and help address problems early, and match the project with lenders genuinely likely to say yes, rather than those that were never the right fit.
Planning a development project?
If you’re planning a development and want to avoid common pitfalls in your finance application, contact your local ASC office. We have over 50 years’ experience helping developers secure the essential finance to realise their project.
