What is Bridging Finance? 

Whether you need finance for property development or construction project, or you want to fund a business expansion, there are several different bridging finance options available.

Qualifying for a construction loan, securing funds to expand a business or premises, and applying for development loans have become more challenging as banks and regulators significantly tightened borrowing requirements.

Many property developers know that problems, frustrations, delays, and even project failures often don’t arise because their plans are not financially viable or potentially profitable – it’s more a case of how different lenders assess projects and predict outcomes.

In this article, we’ll consider what bridging finance is. We’ll also examine how specialist mortgage managers like Prudential Custodians look at finance applications like experienced developers and constructors assess projects. We’ll also look at why it makes sense to use equity to finance development and construction costs.

Cash Flow is King, Delays Cost Money

It’s a common problem. Developers often run out of room to breathe when limiting borrowing to banks and traditional lenders. Cash flow during development or construction can be tight, and banks tend to appraise applications based primarily on balance sheets. The main sticking point is that profit and loss (P&L) can only be measured in real-time.

That poses a couple of significant problems for constructors and developers. Firstly, it ignores the greatest assets developers possess – future sales. Property development is challenging – there’s a lot of money to spend, and much of it only turns into tangible profit once a project can be completed, and units are sold.

Secondly, rigid lending structures can cause significant delays during phases of construction or development. The bank releases funds to clear the site; then, a property developer may need an inspection completed before the lender will advance funds so the building contractor can pour footings and a slab and get essential groundworks and drainage works done. The same can be accurate between the framing stage and lock-up phase, and similar delays may continue right up until practical completion.

Construction can put a considerable strain on a developer’s cash flow. No matter how brief or lengthy, all delays have one thing in common – they’re expensive. And that’s not to mention that stick-in-the-mud lending and rigid requirements can cause hold-ups between projects, too. If a lending structure isn’t flexible enough, developers can be under tremendous pressure to sell the stock before taking advantage of new opportunities.

GRV, Not Just LVR: Bridging finance options that work

While your bridging loan might not look good on paper to a bank, a specialist mortgage manager like Prudential Custodians looks at development projects more like a developer would. Cost-effective, versatile development finance is only possible when ventures are considered for their development potential and financial implications. At Prudential Custodians, we think about the end value of projects, not just your projected P&L.

Gross Realisation Value (GRV) allows developers far more freedom and flexibility during a bridging loan term – because we assess projects and exit strategies carefully before construction begins. That results in fewer conditions during the build, like pre-sales and time-consuming inspections between construction phases.

Not only that, but our real estate expertise allows us to be far less conservative than banks when it comes to LVR. We provide realistic property development financing explicitly tailored for property development businesses. Prudential Custodians utilize equity and end value somewhat, which keeps costs and build times down.

Beyond bridging finance rates: Borrowing that rewards successful developers

Property development and construction sales can be challenging to predict, and it’s important to consider flexibility alongside bridging finance interest rates. Many lenders, including banks, will tie borrowers into rigid three or six-month bridging finance terms. That means they pay bridging finance interest for the entire period, whatever the outcome of their sales and marketing efforts on site.

It can be a rock and a hard place for property developers. They need finance to allow time for effective marketing and sales, but traditional lending can see you get punished when your marketing and sales are booming, and the stock sells quickly. With specialist development bridging finance from Prudential Custodians, when sales are complete, and time to exit, you can settle bridging finance with zero penalties and move on to the next lucrative project.

Development Financiers Who Speak the Same Language as Developers

Prudential Custodians offers tailored development and construction finance solutions. Options are designed explicitly for individual developers with different needs and priorities. Structures are tailored for projects with unique advantages and challenges. Because of all that, approvals are faster, and projects get out of the ground way quicker too.

• Fairer bridging finance: Our clients regularly access versatile funding solutions with favourable terms based on the end value of projects
• Faster Applications: Developers can minimize delays by avoiding the red tape associated with finance applications to central banks
• Not just fair bridging finance rates: Don’t get punished just because your projects and sales go according to plan.

Bridging finance for Development, Construction, and Business

In a nutshell, bridging finance is about leveraging the equity tied up in existing property to fund business or property development. Prudential Custodians clients utilize different bridging finance options in several ways for various purposes:

Many Australians apply for bridging finance to fund the ongoing costs of a construction or property development project: Juggling cash flow during a construction project can be tricky. At worst, a lack of free-flowing finance can see things grind entirely to a halt during a build. Bridging finance provides a way to access the funds you need at different stages of construction and keep things moving along until completion.

When you’re a property developer, funding a construction project from start to finish via one of the central banks can be challenging or even impossible. Most banks and lenders won’t correctly assess the potential value tied up in a building project. They prefer existing structures for security against borrowing – but Prudential Custodians are specialists in the field, and we work differently. That means we can often advance a substantial portion of the land cost and cover construction costs.

Case Study: Using future value to unlock capital

For developers, it’s a catch-22 situation. Banks tend to be very conservative with LVR because they can’t accurately assess the future value of projects – even though that’s where the lion’s share of worth lies. 

A Melbourne developer recently came to us after buying a block of land for $2 Million. The developer has a proven track record and intended to build four townhouses on the block. That involved significant construction costs, but multiple lenders would only advance approximately 40% of the land value. 

Prudential Custodians assessed the project based on the future value of the four townhouses – which equated to a little over $6 Million. We quickly provided a flexible bridging finance solution for our client with a drastically improved LVR that covered the entire construction cost. 

If you’ve bought a block and gained a DA, you can use the increased end value to get the project out of the ground: It’s typically hard work but going through the time-consuming process of obtaining a DA results in a significant increase in land value. The only problem is that most traditional lenders won’t consider that extra value until they can see bricks and mortar. Property development is all about realizing the potential worth of any given project, and rigid lending policies just don’t fit. Prudential Custodians will assess your project based on its merits.

Case Study: Using a DA to get a project started

Our client acquired a block of land for $1.2 Million and proceeded to apply for a DA to build several houses. Once approved, the developer was keen to get construction underway but, despite being a successful and experienced operator, was having considerable trouble finding a lender who would consider the project.

The developer approached us with all the costs and plans for the project, which were straightforward and posed no potential problems. Prudential Custodians was able to carry out a new valuation of $1.5 Million with the DA in place. Within a week, our client could access the $300,000 difference and use the funds to get construction underway.

You can use the equity tied up in your home to fund a new business venture: When they ask themselves, what is bridging finance? Not everyone considers their home. If you’re a company director and demonstrate you need funds for a new business, you can apply for bridging finance based on the equity in your home. Bridging finance lenders will assess the Loan to Value Ratio (LVR) and advance funds accordingly.

Customers use bridging finance to expand an existing business: You can use residential or commercial property to fund a business expansion with a bridging loan. Perhaps you’ve outgrown your current office, or rising sales dictate you need to extend your manufacturing facilities. When that happens, you can use the equity in your existing premises to fund a rebuild, extension, or a move to a larger building.

Use residual stock value to fund a new project: Traditional lenders can be a significant problem when you want to move from one development to the next. Property development opportunities don’t stop just because you wait for units to sell at the end of a successful project. When you need to get that next venture out of the ground, bridging finance can allow you to use the equity in a newly completed site to get things moving on the next one.

Case Study: Leveraging residual stock value

Our client was nearing the completion of a Sydney development that involved the construction of a block of ten luxury apartments. Three had been sold during pre-sales, with a further four apartments selling during the build. There was pressure from the bank to repay construction finance, and a lucrative new development opportunity had already been identified.

The developer enlisted the help of Prudential Custodians, and we were able to quickly provide alternative funding based on the value of the three remaining apartments. By taking a more flexible approach than the bank, we significantly improved LVR – from 40% to 70%. The arrangement gave the developer more time to sell the remaining stock and provided funds to proceed with the new development opportunity.

Use bridging finance to unlock residual stock value and maximize ROI: When you’ve done all the hard work from sourcing a viable site and project, going through the motions of gaining a DA and zoning issues, and completed design and construction, depending on market conditions, you may still have work to do. When a project is completed, and the construction finance term is almost up, many developers are compromised and reduce prices to get stock sold. Finance settled in time – but there is another way.

When your development is finished, Prudential Custodians will advance funds based on the end value – so you can settle construction finance and hold out for a market upturn. You don’t need to sell the residual stock for less than its worth.

Additionally, if the quality of your development is high-end, selling off the plan earlier in the development process may not be ideal. You may want to hold off on pre-sales and achieve more per unit when buyers can view the finished products – and bridging finance from Prudential Custodians can provide the time you need to do that.