With bridge funding growing in popularity there is some confusion among some firms and borrowers about what it is and how it can work for them.
Essentially, a bridge loan is a flexible way to access funds, both large and small, quickly and efficiently over the short term.
Indeed, with mainstream borrowers tightening their lending criteria, the quick application process has helped bridging loans become very popular in recent years.
In addition to the wide range of purposes of this finance, the range of applicants is also growing as more people and particularly firms appreciate the effectiveness of accessible short-term financing opportunities.
Bridging loans, as most people recognise them, are an efficient way for someone to help bridge a gap between financing a purchase while waiting for the monies for it to arrive.
The most common use for bridging finance has been in the purchasing of the property while someone is selling their current home but needs to buy a new home; the bridging loan will then provide the money over a short-term so the new home can be purchase.
A bridging loan isn’t just about buying a home
However, a bridging loan isn’t just about buying a home any longer – they can be used for a wide variety of purposes which also helps explain their growth in popularity.
The other big interest for a bridge loan is they can be utilised for a variety functions and the loans are used, for example, for the renovation or buying of property.
Indeed, the money can be used for financing the purchase of commercial and residential property and may see an investor using the cash to add a toilet so they can then apply for a mortgage and repay the bridging finance.
Other developers will use bridging finance to purchase a property at auction knowing they can make a bid and then complete the application process to meet the auctioneer’s deadline.
Bridging loans are popular with property developers as well as landlords looking to add to their portfolio. Company owners can also use them to buy stock for a promotion, for instance, or to refurbish their premises.
The next step is how to apply for a bridging loan.
Perhaps the most effective way is to of accessing bridging financing is to make use of a specialist bridging finance broker.
That’s because they will have the knowledge of finding the right lender for the borrower’s requirements and have the expertise to complete the application form. They will also be able to discuss what ‘open’ bridging loans and ‘closed’ bridging loans are.
The pros and cons of a bridge funding loan
It’s important to understand the difference between the two when considering the pros and cons of a bridge loan.
When contemplating bridging financing, the borrower will be asked about their strategy for repayment since the lender will need to know how and when they are going to get their money back.
The advice a borrower receives is going to be important with most lenders not only needing to know about their exit strategy as this will have an impact on the interest to be paid.
Just to clarify: an exit strategy means the lending institution will need the loan to be cleared in full, together with interest and costs, or whether the borrowings will be transferred into a long-term loan, for example, a fixed mortgage.
So, an open bridging loan is one where the borrower does not have a date for repaying the money and a closed bridging loan is when the borrower does know when they are able to repay the loan and how.
In our earlier example, the borrower wanting to buy a new home while selling their current one will have a closed loan since they will know when the date for exchanging contracts is.
Why borrowers would choose bridge financing
There are many explanations as to why borrowers would choose bridge financing but it basically comes down to the ease of obtaining substantial amounts of cash simply and quickly to solve a pressing financial need.
Borrowers should understand that it is a short-term loan that is used until the borrower manages to procure long-term financing that will settle their loan.
As we mentioned previously, it is much simpler to use the experience of bridging finance brokers to access the many different finance deals – a boon when there is a growing list of bridging loan funders and offerings.
Additionally, bridging lenders aren’t working to the same strict standards that high street banks are so they are able to give cash within hours or days should there be a demand. For many borrowers, this capability is also a big plus.
Normally, bridging financing may be organised within a few days or a week depending on the legal and valuation work involved with regards to the security being put up to obtain the bridging loan.
It should also be appreciated that the lenders of bridging finance also charge administration fees for their loans, plus the legal and valuation fees if necessary, but even with these charges the loans still make an attractive proposition for many – though they aren’t as cheap as securing finance from a high street bank, for example.
Fees and charges involved are explained beforehand
Be aware too that some lenders may also charge exit fees as well – though many do not. All of the fees and charges involved are explained beforehand and will be part of the agreement so the borrower can see what they are paying for.
Indeed, it’s also the reason why all bridging lenders have a finance calculator on their sites with the fees detailed there; the larger the borrowing, the larger the fee.
The calculator will also detail the relevant rates of interest and the costs involved; the process is open and easy to appreciate when looking at the various bridging lenders.
Basically, there are lots of reasons why a borrower would choose to utilise bridging financing and the helpful team at The Bridge Crowd have the expertise and experience to answer questions from those interested in bridge funding.