It's arrived! Your development plans have been given the green light, and as you scroll endlessly through those little pictures, imagining how it's all going to look when it's done, there's only one question left to be answered - how are you going to fund it?

If you're in the position of having enough cash in the bank to fund the whole build with your own money, kudos to you. Most of us, however, will need to get construction finance.

And anyone who's dealt with a lender knows that in order to borrow money, you need to first prove you don't need it, right? Okay, so maybe that's a bit extreme, but you definitely do need to show the construction lender that lending funds to you is a good idea.

So how do you do that?

I know I've said this many times before, but it has to be said again: there are two distinct types of lending, residential and commercial. Your first task is to work out which one of these applies to your project, as it makes a difference.

Residential

Lenders will generally only offer residential finance for small projects. It can vary a bit, but anything under four lots or dwellings is usually okay for residential finance.

Generally their financial criteria will revolve around serviceability. So you need to prove that you can afford to make the loan payments throughout the project.

Residential finance is also mostly based on the idea that you're going to keep some or all of the project at the end of construction. Again, you'll need to show there's enough equity for the lending to stack up at that point, and that you will continue to be able to service the loan moving forward.

Commercial

Commercial lending is generally for bigger builds, three or four upwards, although I have seen it used for duplexes on occasion.

In this scenario, it's all about the end value of the project. The lender will only lend up to a certain percentage of the end value, so if it's going to cost more than that to build the project, you could be in trouble.

Commercial lenders recognise that the goal is to sell some or all of the project at the end, so their focus is on comparable sales and potential profit. Most of them capitalise interest, meaning you don't need to make monthly payments on the loan, which means serviceability is less of an issue.

Both - Have A Plan

You need to have a plan. In fact, you need to have more than one. Start with a detailed construction plan, including timelines, milestones, and cost estimates. Show that you have thoroughly researched the project and have a clear roadmap for execution.

Add a comprehensive business plan. Include details about the project scope, timeline, budget, target market, potential risks, and how you plan to mitigate them. A well-thought-out plan demonstrates your preparedness and commitment to the project.

For a commercial lender (or investors) these plans take the form of an Information Memorandum (IM). It incorporates all of these aspects. For a residential lender, though, you might want to keep it simple so you don't give the impression that you're doing anything that will get you moved across to commercial finance.

Make sure you identify potential risks associated with the project and outline strategies to mitigate them. This could include contingency plans for cost overruns, delays, or changes in market conditions.

Also ensure your project complies with all relevant laws, regulations, and zoning requirements. Lenders will be more comfortable financing a project that is legally sound.

Experience and Expertise

Residential lenders won't necessarily expect you to be an expert in construction, but it's important to show that you're working with experienced people. Lenders will often want to see a comprehensive CV from your builder so they can determine if they're reliable and experienced.

In the commercial space lenders are looking to make sure you have the skills to complete the deal, so highlight your experience and expertise in the construction industry. Provide a detailed resume outlining your relevant skills, qualifications, and past successful projects. If you have a team, emphasize their qualifications as well.

Bottom line, the lender wants to know their money is being spent wisely, so you need to demonstrate that capability.

Security

Obviously the lender wants to get their money back, along with all the interest, so show evidence of your financial stability. For residential lending, this could include personal financial statements, tax returns, credit reports, and any other relevant financial documents.

In the commercial space, the lender will feel more comfortable if you have other assets apart from the project they're financing. Often they'll expect you to offer collateral to secure the loan. This could be real estate, equipment, or other assets that the lender can seize if you default. Having valuable collateral reduces the lender's risk and makes them more likely to approve the loan.

While there can be some crossover between lending types, essentially lenders want to ensure you have the financial capacity to support the project. And more importantly, that you have resources they can seize if you default.

Relationships

If possible, leverage existing relationships with lenders or financial institutions. Having a strong rapport with the lender can increase your chances of approval.

Having said that, you can also leverage a broker's relationships too. It's vital, though, that you work with a broker who has a good track record of securing the type of finance you need. I've lost count of how many times people have been knocked back for development finance by their broker - whose usual business is helping clients buy their own home. Don't make that mistake.

By following these steps and presenting yourself as a competent and trustworthy borrower, you massively increase your chances of securing financing for your construction project.