While credit cards, overdrafts and conventional loans serve invaluable purposes, they’re often too slow and too limited in scope to cover requirements. When larger sums of money are needed over short periods of time, bridging loans could be the answer.
Bridging loans are specialist financial products, typically offered in sums of at least £25,000 to be repaid in no longer than 12 months. Businesses and property developers routinely use bridging loans to ‘bridge’ gaps in their own finances, subsequently paying the entire balance back in one lump sum as quickly as possible.
With bridging loans, exit strategy refers to the strategy by which the balance of the loan will be repaid by the borrower. It is critically important to ensure that a reliable exit strategy is in place, given that bridging loans are not intended for use as long-term financial products. Shorter repayment periods naturally attach higher monthly interest rates, meaning excessive costs in the event that bridging loans are not repaid as initially agreed. Renewal fees, penalties and additional charges are almost always payable if the loan is not repaid on time.
An exit strategy is only considered viable when it is 100% guaranteed. One common example of an exit strategy being the sale of a property – you know the money is coming, but you cannot get your hands on it right now. Just as soon as the property sale goes through, you use the funds to repay the balance on your loan. If there are any concerns or discrepancies whatsoever regarding your exit strategy, it does not represent a viable exit strategy.
There are several alternative options to bridging finance, which depending on the requirements of the borrower could prove more or less appropriate. Examples of which include conventional and commercial mortgages, secured loans, commercial loans, development finance and asset loans.
In all such instances however, there are typically delays involved in the procurement of the funds required. If financial support is being sought to bridge an immediate gap, bridging loans are usually the preferred option.
Nevertheless, it pays to speak to the professionals before making any significant decisions regarding financial products like these. Independent expert advice should always be sought ahead of time, in order to carefully consider all available options. Working with a leading broker means gaining access to the largest market of established and independent lenders across the UK, offering an endless array of dynamic and flexible financial services.
Bridging loans are also routinely used by investors looking to purchase properties at auction. In most instances, a successful bid at an auction means paying the initial 10% deposit within the first 24 hours, followed by the rest of the balance in no more than around 14 days. As it can be extremely difficult to procure such extensive funds by way of normal mortgages and loans, bridging finance offers a lifeline for auction property buyers.
Once again however, it’s important to ensure that you have a guaranteed exit strategy in place, in order to repay the balance of the loan as agreed. Before going ahead, consult with a reputable independent broker to explore the various types of auction finance available, ensuring you’re happy with the agreed terms and borrowing costs.