Many types of debt finance are available. The differences between them are the term of the loan and method of repayment.
Loans for property development and investment are invariably backed by the security of a mortgage over the property for which the loan is required.

 
The term ‘mortgage finance’ usually refers to a long term loan entered into to enable the owner to acquire the subject property. Short term development finance is often referred to as ‘bridging’ or ‘construction’ finance. Several common types of property finance are:
 

Bank Overdraft

A bank overdraft is an arrangement allowing a cheque account to be overdrawn (i.e. have a negative balance) up to an agreed limit. The facility will have been made available on the security of assets owned.
 Once the facility is in place, the borrower can obtain funds at will and repay them at will.
There is an initial fee for setting up the facility, an annual fee for maintaining it and interest is payable when the account is in debit, but not when the account is in credit.
Overdrafts are usually used for working capital purposes over relatively short terms although once the facility is arranged it can be maintained indefinitely.
 

Commercial or Bank Bills

These are bills of exchange which are the business of the short term money market. A bill constitutes an agreement whereby funds are made available now in return for a future known payment including interest. The terms can be anything up to 180 days, usually in multiples of 30
days.
Funds can be ‘rolled over’ indefinitely which involves a series of agreements each new one repaying the previous one. However, a fee is charged each time the bill is rolled over. Moreover, interest rates in the short term market are volatile and can vary from 5% to 20% over 12 to 18
months.
The interest rate is fixed when the bill is agreed, but the borrower is at the mercy of the market if a series of rollovers is contemplated.
Short term funds are often used for property development because they offer opportunities to adjust the amount of funds borrowed at rollover dates.

Fully Drawn Advance

A fully drawn advance provides a known amount of funds for a known medium to long term period (3 to 10 years) at a known rate of interest.
Repayment installments are usually made on a regular monthly basis from the outset consisting of both principal and interest.
However, interest only repayments are possible and the interest rate may be tied to the banks indicator rate which will cause variations during the loan return.

Term Lending

A term loan is also for a medium to long term period (typically 3 to 10 years). The opportunity is usually provided to borrow funds in installments up to an agreed maximum and to postpone repayments until cash inflows are generated. Thus, this form of financing is ideal for property development project finance in that funds ay be drawn down as required to make construction progress payments and loan repayments may be postponed until the property is let and rent is being paid.
The repayments are usually interest only which is capitalized and added to the loan principal until rent is earned. At the end of the development, the whole of the loan is repaid in one big final payment known as a ‘bullet’ or ‘balloon’ payment.

Other Types of Debt Finance

There are many other types of debt financing evolving out of the secondary market which are beyond the scope of this brief list. These include:
finance lease and leveraged lease,
corporate bonds,
notes and debentures;
inter company and
trade credit.
 

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