How does bridging work? Benefits and Risks

What is bridging?

Bridging loans in their purist form are simply short term, high value loans. They were traditionally used to prevent shortfalls between buying and selling your house. As the market matures and develops, it has now become an option for individuals to fund business or private expenditure against their property too.

Some loans in recent years have included financing the purchase of a property at auction, capitalising on a business opportunity, raising short-term capital against equity in a property and to fund the refurbishment of a property.

Closed or open?

A closed bridging loan is a when the borrower has a defined exit plan in place when taking out the loan. This could be an already approved source of credit like a mortgage, but the borrower needs cash in a shorter time frame. Another popular case of this is when the buyer of your property needs to draw equity on his home before payment is made, which can put you in a position where you need to borrow until the sale has gone through.

An open bridging loan has more risk, and an exit strategy will have to be very detailed but is not definite. An example of this is when someone who is selling a property finds a buyer, but they drop out before the sale goes through. A bridging loan is taken to cover the cost of buying your new property, but have no concrete sale for the house you are looking to sell.

How does it work?

By using your property with equity such as residential, commercial and land, you can borrow up to a specified loan-to-value ratio, based on the value of the assets. This can be anywhere between 0% and 80% based on your personal situation and how easy the asset would be to resell. You are then charged interest monthly on the loan, and it can be paid back when you secure another source of finance, be that a mortgage or the sale of an asset.

Why would I not go to a bank instead?

The speed of the loan going through is the biggest benefit of bridging finance. If you are in the market for a bridging loan, more than likely you will be in a hurry to get the money. Where banks have a lot of paperwork, which can in some cases take months, a bridging loan is often approved within a week. You can borrow the money up to a year, and with the huge expansion of the bridging loan market and low base rate of interest, loans are very competitive.

Although mainly used in property, businesses are increasingly turning to bridging loans to cover short term cash flow and liquidity problems, by managing directors and owners using their private property as a security. Bridging companies offer a very personalised service to ensure you can meet the requirements of the loan, and they will get their money back.

What are the risks?

A bridging loan is not for every situation, and a well thought out exit strategy must be in place before you will be allowed to borrow the money. A closed bridging loan can save a lot of trouble and losses in fees over the short term, making bridging loans very beneficial. However, an open bridging loan is a lot riskier and it may be possible that other sources of finance are more beneficial in some cases.

The beauty of bridging financiers is that the personalised approach will talk you through every step of the way. It’s in nobody’s interest to default on the loan; therefore every precaution will be taken to prevent this from happening.

Can a bridging loan work for me?

Depending on your scenario, bridging loans are useful when it comes to property. Be that buying to redevelop or simply covering a short term gap in capital. It can also be used in business to raise short term capital to meet a stock shortage or short term cash flow problems. All in all, with a well-planned exit plan, bridging loans can be used for any property or commercial expenditure.

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