Bridging Loan Myths
This week we continue our series on myths and misconceptions when it comes to finance. Last week we looked at Small Business Loans, this week we focus on Bridging Loans.
Bridging Loans are normally used to finance the gap when you need to complete on a property but are waiting for funds to become available from the sale of another property you already own.
Bridging loans can of course be used for many other reasons, but the key with any bridging loan is the exit route, and that would normally be the sale of a currently owned property.
Bridging finance is a very well-established sector with the funding landscape, with many great lenders offering excellent deals. However, partly because of the way bridging loans have been offered in the past, often by unscrupulous lenders, there have been some myths that have arisen around all bridging loans.
So, this week we seek to address and dispel some of these myths and misconceptions.
MYTH 1 – A BRIDGING LOAN IS THE LAST RESORT
Bridging loans are seen by many as a last resort borrowing option. In fact, bridging loans are most commonly used as a solution to an everyday problem that occurs within the property market. Namely, an existing property hasn’t sold, whilst a new property being purchased needs to be completed.
In this scenario, a bridging loan is an ideal solution, and over the years we have arranged a bridging loan many times to ensure our clients didn’t lose the opportunity to acquire their new property.
Bridging loans are indeed a very viable option for people who need a quick but short-term loan, thus enabling a property acquisition to proceed that otherwise wouldn’t have done so.
MYTH 2 – BRIDGING LOANS ARE EXPENSIVE
Historically, bridging loans were seen not only as a last resort but also as hugely expensive, with high-interest rates and fees. That may have been true years ago, but is no longer the case, with bridging loans having evolved into a competitive and viable option for many.
Indeed, we are arranging bridging loans from as low as 0.49% per month going up to around 0.75% to 0.9% being typical for many bridging loans. But as they have gained in popularity, the market has become increasingly competitive, and the cost of ‘standard’ bridging loans has fallen.
In addition, it should always be remembered that bridging loans are a short-term solution to ‘get a deal done’ and so cost may not always be the only consideration.
MYTH 3 – BRIDGING LOANS ARE ONLY OFFERED BY UNSCRUPLOUS LENDERS
Again historically, if you needed a bridging loan, the perception was that the only option was to go to what might be described as a ‘back street lender’.
That is no longer the case. Bridging loans are now mainstream with the result that there are some excellent lenders offering great deals. However, my advice if you are unsure, is to use a reputable broker to help steer you through the options. If you need help choosing a broker, contact the National Association of Commercial Finance Brokers through their website (www.nacfb.org) and they will be able to help you.
MYTH 4 – BRIDGING LOANS ARE ONLY NEEDED FOR THE PROPERTY INDUSTRY
Bridging loans are popularly used when purchasing property, but, they can be used for a variety of reasons. Providing a property (residential or commercial) is being offered as security then bridging finance can be used for a variety of reasons, including:
- Working capital for a business
- Renovation of a property
- Settlement of an outstanding tax bill
- To help grow and develop an existing business
The key point is that whatever the reason, you must have an exit strategy for repayment of the bridging loan. Bridging loans are by nature short term, with a term of typically 6 to 12 months. As a result, when you take out a bridging loan you must have an exit strategy.
That can be the sale of a property or other asset, or alternatively, it can be a refinance of the bridging loan onto a longer-term business loan or commercial mortgage.
The important thing is to have a strategy for exiting a bridging loan and often as part of their due diligence, a prospective lender will want to understand what the proposed exit will be.
In conclusion, if you feel that you or your business could benefit from a well-structured bridging loan, the first step is to find a reputable lender or finance broker.
At Funding Track, we would of course be delighted to help you source the right funding solution, so please contact us today to find out how we can help.
- keith.park@fundingtrack.com
- 020 3857 3030
