What is Development Capital?

Development capital refers to money used in the development of real estate or business ventures. In the case of real estate, development capital is money used for the construction of a new property or rehabilitation of an existing building. In a business venture, development capital refers to money used to start, maintain, or grow a business.

Real estate development capital refers to the money needed to develop a property, like demolishing existing structures, clearing and grading land, and preparing the site for a vertical structure like a house, apartment building, or retail store. To obtain this type of capital, an investor or property owner usually first creates a plan to submit to potential lenders. This plan usually cites proposals and bids from licensed contractors and builders estimating the overall construction costs to develop the real estate. Lenders assess the value of the potential development to determine how much capital they will lend to the real estate owner or speculator. This loan is paid back back through the future rental income of the real estate or through the final sale of the property.

Business development capital refers to money used in the "development" of the business. This can be start-up capital to get the business running, working capital to keep the business running, or expansion capital to help the business grow. The capital could be used to purchase new equipment, add additional business locations, or increase existing lines of business.

Businesses can obtain development capital through several sources, like bank loans, lines of credit, grants, and angel funding. A development capital loan is one in which the business equipment and property are pledged as collateral for the loan. The Small Business Administration (SBA) is one of the largest lenders of development capital to businesses in the United States, offering a wide range of loan amounts. Development capital can also come in the form of a line of credit, which is treated as revolving line similar to a business credit card. These lines of credit are typically priced at higher levels of interest than business loans.

Government and community agencies often offer grants to non-profit companies for development purposes. To obtain a development capital grant, business owners usually have to submit a business plan and a grant proposal, which can take a considerably longer amount of time than obtaining a simple loan. Grants, however, do not have to be repaid.

Perhaps the most misunderstood, and hardest, development capital to obtain is angel funding. This type of development funding is usually reserved for high-concept businesses with a strong likelihood of success in their given field of industry. To obtain this type of development capital, the business owner usually needs to give up a portion of their ownership of the company.