Do you need to move quickly to take advantage of a business opportunity, or purchase an available property? Then you might want to consider a bridging loan.
Bridging loans can be an attractive and quick solution to some of the problems that crop up when buying or selling property. Bridging loans are a form of short term finance which people use to buy property (whether for residential or commercial use) before their long term funding becomes available, for example through the sale of their current house if they are a homeowner who wants to move.
When do you need a Bridging Loan?
Ideally, you should have bargained or negotiated the property price before you considered taking out a loan. This obviously reduces the amount you need to bridge the gap and can make paying the loan back much easier. A real estate agent can be vital in this department as price negotiation is a big reason why should you use one.
A bridging loan is often best used when a limited-time opportunity arises. For example, if you are a property developer, and a property opportunity presents itself at auction, a bridging loan is an effective way to gain access to the necessary funding very quickly. While traditional high street lenders can take months to approve an application, bridging loan firms usually take a maximum of two weeks; sometimes as little as two days. This makes them very attractive for anyone looking for quick and easy access to immediate funds.
Lending criteria
While bridging loan firms are typically much quicker than traditional lenders, they still apply conservative and sensible lending criteria to ensure that they are giving cash to a sound prospect. They will therefore examine your credit history, the strength of the asset you are investing in, and whether you have a sound repayment/exit strategy.
When used for business purposes, the terms of a bridging loan are much more flexible than other financial loans, and can be agreed for as little as one day, though the majority are made for 12 months, and some lenders may agree to up to 24 months. They can also be raised should your needs require it, from a few thousand pounds to several million. This is of course dependent upon your business’s ability to repay the money.
The loans can also be arranged on a second charge basis.
How much do bridging loans cost?
Bridging loans provide short term, specialist finance. Like all short-term loans, they tend to be more expensive than traditional or long term lenders. However, on a more positive note, with the increasing number of bridging loan lenders entering the market place, the fees and interest rates have become much more competitive. This means that it is necessary to shop around the different lenders before committing, as there is no universal offering and rates can vary greatly. Most bridging loan firms will have a calculator on their website so it is easy to check what rates and fees they are offering and how much value for money they are in comparison to other lenders.
A lender’s arrangement fee will be charged, which may have an administration charge as well. The lender may also charge an exit fee once the loan has been repaid, regardless of whether the loan is repaid early or at full term, which will typically be one month’s interest. The usual legal fees also need to be paid, though with many bridging loan firms this will be included with the arrangement fees as they will have an in-house lawyer to address any legal requirements. Of course, there will be a contract drawn for any kind of loan that you take to signify the pact of lending and borrowing. However, if the legal jargon and documents get too much for you to decipher, you could seek Independent Legal Advice from professionals in this field to educate yourself before signing any papers.
Bridging loans are a form of secure borrowing. Therefore any businesses that take up a bridging loan as a finance option need to provide security in the form of land, property, stock or some other form of security depending on the lender. Also, a surveyor’s fee will need to be paid when the property is looked over.
