What Is Bridging Finance and What Is Development Finance - And When Use Which?

In the midst of building projects and construction work, particularly in a business setting, the roles of bridging finance and development finance are often interchanged and confused. Whether you are developing a property for buy to let, or need to access capital for a ground up project, we discuss the differences between these two popular types of finance.

Bridging finance is a short-term loan used to cover urgent or temporary gaps in funding. For example, you might use it to buy a property at auction, to avoid missing one purchase because you haven’t sold another, or to move quickly on a deal, waiting to refinance or sell. Terms are often from 12-36 months*, charged at around 0.5%-2% per month.*

Development finance, by contrast, is used when you are building or doing large work on property: ground-up construction, converting commercial into residential, or major extensions. The finance is released in stages (called “drawdowns”) aligned to building milestones.

You repay it when the project completes, or sometimes through a long-term refinance or sale. The Terms usually run for several months to a few years.

When to Use Development Finance Over Bridging Finance

You would typically use development finance instead of bridging finance when the property needs significant building work, or structural conversion, where the costs are large and span over a long time. If you need cash quickly to buy land or a building, but then have to pay to build, development finance gives you staged funding for both land (or purchase) and construction.

If you simply need a quick injection of capital and expect to pay it back shortly, perhaps by selling something, refinancing, or completing a sale, this is when bridging is usually more appropriate.

Bridging finance tends to be more expensive per month or per short term because of risk and speed. Development finance spreads risk over a longer period, but because of its size, complexity, and staged release the costs and fees can also be significant—but more suited to large, longer projects.

Who Offers Development and Bridging Finance

The majority of loans are funded by private lenders, institutions and challenger banks, rather than mainstream high street banks like Barclays or Nationwide.

Private lenders can work in a regulated or non regulated environment, with the difference being that regulated lenders can lend against a person’s primary residence.

The benefit of being a private lender is the speed of administering funds, with bridging and development finance often available to borrowers in a few weeks, compared to months and far stricter checks amongst banks.

Well known lenders in the space that operate both bridging and development finance are Precise Mortgages, SPF, Shawbrook Bank and Maslow Capital.

Why Are The Two Often Confused

Many people mix up bridging and development finance because both are non-standard property funding options, and often used by property developers or investors rather than ordinary homebuyers - and they become popular options for people who are looking for quick options away from high street banks.

Some bridging loans are used for refurbishment or conversion, which overlaps what development finance does. Also, some lenders offer loans that blur the line: for example a bridging loan used to buy land, then paying for building works, which starts looking like development finance.

Another confusion comes from terminology: phrases like “short-term construction finance” or “works loan” sometimes appear in both kinds of finance. People unfamiliar with the industry don’t always see the difference between a loan that is meant to be repaid very quickly and one that supports building work over time.

Repayment Examples

Here are two simplified examples of how repayment might work in each case:

Example A: Bridging Finance RepaymentSuppose you take a bridging loan of £500,000 to buy a property at auction. The loan is for 6 months at a bridging interest rate of, say, 1.2% per month. After 6 months you also have to repay any fees. If interest only rolls up (i.e. you pay all at the end), at 1.2% per month over 6 months that’s about 7.2% interest total (i.e. £36,000). Add maybe £2,000 in fees. So you repay about £538,000 at term end. You might be able to pay it off by getting a normal mortgage or by selling another property.

Example B: Development Finance RepaymentYou plan to build 10 flats on a plot. You borrow £1,200,000 via development finance. The lender releases money in stages: first to buy the land, then for foundations, structure, internal works, etc. Let’s say the term is 24 months. Interest rate is, say, 8% per annum, rolled-up. You also have an exit strategy of selling the finished flats or refinancing. 

At the end of 24 months you’ve incurred interest on the outstanding sums for each stage, maybe fees, and repay the full amount (land + works + interest + fees). Suppose your drawdowns averaged half the full amount for a year (because later drawdowns happen later in the build), roughly you might incur £90,000-£110,000 in interest and fees, meaning total repayment might be around £1,310,000 to £1,320,000 if everything proceeds as planned.

Conclusion

In summary, use development finance when property work is extensive, time scale is longer, and you need funds released through stages. Use bridging finance for speed, short time, less construction, or where repayment is imminent.

The two are often confused because both cover “non-standard property funding,” often for investors or developers, and there is some overlap in use cases. Knowing the key differences—term, costs, what the money is for, how repayment works—is essential so you pick the right option for your project.

Source:

*Loan terms - 12-36 months - https://www.bridgingtrends.com/

*Loan rates - 0.5%-2% per month - https://www.moneysavingexpert.com/loans/bridge-loans/