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Bridging Loan Advice

At KIS Finance we provide free bridging loan advice about bridging loans and alternative methods of finance so that you can get the best possible deal.

Although short term finance requirements are often provided through the use of facilities such as bank overdrafts and credit cards, there are times when large sums of money are required for just a short period of time.

Bridging loans are specialist finance facilities used to provide short term loans (typically above £25,000) for a short period of time (between 1 to 12 months). The traditional use of bridging loans is to ‘bridge’ the gap in finances that occurs when properties are being purchased and sold within a chain but completion dates can’t be arranged for the same day.

The important factors or key selling points for bridging loans, is that they are:

  • Quick to arrange – making them ideal when funds are required to snap up a bargain.
  • A cheap option for borrowing large sums of money that is only required for a short period of time – other options for raising large sums may have a low monthly or annual rate of interest making them ideal for long term financing, but when their set up costs and early redemption charges are taken into consideration, they may be a very expensive short term option. Bridging loans tend to have lower set up costs and higher monthly rates of interest.
  • Flexible in terms of their underwriting – bridging lenders can be considerably more flexible with regards to credit history, proof of income and credit arrears.
  • Flexible with regards to the type and condition of the property being used as security – property that is in a poor state of repair, in need of renovation, or unusual property types including non standard construction, may all be considered acceptable security by a bridging lender.

Important considerations before taking out a bridging loan

Exit strategies

Since bridging loans are not intended to be used as long term methods of finance, it is very important to have a reliable exit strategy in place in order to be able to repay any bridging loan at, or before, the end of its term. This is because bridging loans usually have a high monthly rate of interest making them expensive if used for anything other than short term finance. In addition many bridging lenders will charge additional fees, such as renewal fees, if you go over the agreed bridging loan term.

Your exit strategy should therefore be a ‘sure thing’ and if it is not you need to make sure that you also have a backup exit strategy ready. For example your exit strategy could be to clear the bridging loan following the sale of the property, in which case do your homework with regards to pricing and what price you can realistically expect for the property. It would also be worth while investigating what price maybe achieved if the property had to be sold quickly. [read more]

Another option used as an exit strategy is refinancing, which would typically be used if the bridging loan was taken out to help finance restoration, renovation, other building work and new developments. Once the property is finished and in a condition that it can be used as security for a more traditional mortgage, then a buy to let mortgage, commercial mortgage or other long term facility can be used to repay the bridging finance. If you intend to clear your bridging loan by refinancing, it is very important to ensure that you are able to obtain the required finance facility. Remember that since the credit crunch lending criteria is less forgiving as lenders have limited funds and are therefore more selective.

For businesses that use commercial bridging loans to fund large orders or to cover short term cash flow problems their exit strategy could be to clear their loan when they receive payment from customers who owe them money. In these circumstances it is probably a good idea to have a backup plan in place in the event that their customers are unable to pay their invoices.

Sometimes bridging loans are just taken out to enable the purchase of an absolute bargain which will then be sold for a quick profit. In these circumstances make sure that you are certain that the bargain item is exactly that, and if it doesn’t sell for a profit ensure that you have alternative funds that you can use to repay the bridging loan. Furthermore if the bargain item is property, remember that many main lenders have the 6 month rule (or even 12 month with some lenders), that means they will not provide funds to purchase a property if it hasn’t been owned by the current owner for at least 6 months. This could therefore affect your proposed sale if you intend to sell the property within 6 months of owning it because prospective purchases may find it difficult to arrange a mortgage due to the 6 month rule.


Alternatives to bridging finance

Despite being a specialist source of finance that often provides the best borrowing option in terms of cost and speed, quite often there may be a better alternative to bridging finance!

Funds can be required quickly when picking up a bargain investment property leading investors to using a bridging loan to secure the purchase which will then usually be refinanced using a buy to let mortgage 6 months later. However it is possible to purchase an investment property using a buy to let mortgage within as little as 2 weeks! Well it is when using ourselves anyway!

Short term business cash flow problems can take advantage of a commercial bridging loan, but they may also be able to release funds tied up in their assets through asset refinancing, or make use of invoice finance to release money due from outstanding invoices. Both asset refinancing and invoice finance can be put in place quickly and can provide a cheaper alternative to bridging finance.

Other alternatives include development finance, commercial loans, secured loans, commercial mortgages and asset loans.


Advice for arranging finance to buy at auction

Before making a bid at auction it is strongly advisable to ensure that you have funds in place beforehand. If your bid is the winning bid you will normally be required to pay a 10 percent deposit that day and the balance normally within 28 days, although sometimes this can be as little as just 14 days. It is also advisable to ensure that you have viewed any property you intend to bid on, have had your solicitor look over the legal pack, checked for any special conditions and if possible have had the property surveyed.

If you need further bridging loan advice please call us today

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