A bridging loan can be an excellent solution to raise high capital sums quickly. This term can be anything from a few days to many months, the norm being a maximum of three years. They differ from traditional mortgages and other funding solutions because the capital is repaid as a lump sum. Lenders will want to see solid plans for repayment when making the bridging loan application.
What Are Bridging Loans?
Bridging loans are short-term, interest-only loans that are designed to be repaid in full at the end of the loan term. The term can range from a few months up to two years, and the loan amounts typically start from around £25,000 and go into the millions. As they’re secured loans, the lender will require collateral, typically in the form of property or land.
Benefits of Bridging Loans
The most significant advantage of a bridging loan is its speed. Traditional loans can take weeks or even months to process, but a that can often be secured within days. This swift access to funding can be crucial when quick capital is required. Moreover, as the loans are secured, businesses with poor credit histories may still be eligible if they have valuable assets to secure against the loan.
Uses of Bridging Loans
Bridging loans are often used to secure property at auction, where a deposit is needed on the day, with the balance payable within 28 days. They can also facilitate a quick property purchase, pending the sale of an existing property.
In a business context, these loans can provide short-term cash flow cover, enable refurbishment or development of property, or help in the acquisition of new business premises.
Risks and Drawbacks
While this kind of loan can offer rapid and flexible financing, they also carry certain risks. The interest rates are typically higher than standard loans, given the short-term nature and the level of risk that lenders assume. This can mean the overall cost of borrowing is substantial.
Secondly, bridging loans are secured loans, meaning the property used as collateral is at risk if repayments aren’t met. As such, a clear repayment strategy is critical when taking out it.
Choosing a Bridging Loan Provider
When choosing a provider, consider factors such as the loan-to-value (LTV) ratio, interest rates, and whether the lender is regulated. A regulated lender will be overseen by the Financial Conduct Authority (FCA), providing additional safeguards for borrowers.
LTV ratio is the loan amount relative to the value of the property used as security. A higher LTV will mean you can borrow more, but the interest rate may be higher. The lender will also consider the ‘exit strategy’, the plan by which the loan will be repaid. This could be from the sale of the property, a longer-term mortgage, or another agreed source.
So, this loan can be a powerful tool for businesses in need of short-term finance. However, due to their high cost and potential risk, they should not be taken out without careful consideration and planning. Always consult a financial advisor before taking out a bridging loan, to ensure it is the right choice for your business circumstances.
If you are unsure of the exact date that funds will become available to repay a loan, lenders may offer an open bridging loan. In this instance, you know exactly how you will repay the loan, but not the exact time that the funds will become available. It is essential to present a solid exit plan that gives the lenders confidence that you will be able to repay the loan on the specified date, as is required with a closed bridging loan, which leads us to look at typical exit plans. However, there are many options for repayment.
Leading brokers that are experts in bridging loans have the expertise to arrange competitive bridging loan finance for high-net-worth individuals, those with complex financial structures or unusual reasons for requiring short-term borrowing, which can smooth the process.
Property Sale
Property chains and selling timing differences are common reasons to use bridging loans to help avoid a costly break in a chain. Where you are selling a property and buying another, there can be timing differences whereby sale proceeds will not be available at the completion date for the property you are buying. A secured on the property you are selling, even if you do not know how quickly it will sell, will give you the liquidity you need when you need it. An open bridging loan agreement will provide you with the flexibility up to a certain point to repay the loan.
Refinancing
Another common way to repay a bridging loan is refinancing with a new lender. The new lender will repay the bridging loan when they agree to your borrowing. You will usually refinance to a longer-term lending solution, such as a mortgage or other loan. Mortgages and different alternative loan types will take longer to organise, so a bridging loan will be used to provide a short-term solution to your liquidity needs. Refinancing to clear a bridging loan will usually be at a lower interest rate.
However, the flexibility and speed of bridging finance allow you to take advantage of opportunities whilst waiting for the often far lengthier traditional mortgage borrowing allows.
Asset Sales and Liquidity Events
To repay your bridging loan using capital raised from other sources, such as selling shares, assets, or business proceeds, is another way to repay the lump sum required at the end of the term. Lenders, in this instance, will be more interested in ensuring you have enough capital to repay the loan on the due date. The liquidity event itself is less important than your case supporting you have sufficient means to repay.
This kind of credit can open up many possibilities. They can access the smaller niche lending institutions and negotiate the best refinancing options tailored specifically to you. However, the support of a bridging finance broker ensures you explore and understand fully the options available, especially where you require a longer-term loan to repay the bridging loan.
