A poor exit strategy can wind up being very costly
Before taking out any bridging loan it is very important to be sure of your exit strategy, which is the method by which you are planning to repay the finance facility. Entering into any short term loan agreement without a suitable exit strategy can prove to be very costly. Bridging loans have their uses, but when compared to other finance facilities that provide large amounts of funds over longer terms, their higher monthly rates of interest can make them an expensive option. In addition many bridging or short term loan facilities are expected to be repaid by the due date and failing to do so can lead to considerable additional costs.
There are bridging loan providers who will happily extend their facilities past the original agreed term. However, others will charge large penalties for being late or high renewal costs, and there are some who will immediately start legal proceedings looking for repossession. Therefore if your exit strategy is not reliable with regards to timeframe it would be a good idea to think again about taking out your proposed loan, or opt for a lender who is easy going about extending the facility.
Typical exit strategies for repaying bridging loans include using the funds from the sale of a property, business or shares, cashing in investments, from the proceeds of repayment of a debt, inheritance, a business transaction or other money expected and refinancing. The two most common exit strategies are the sale of a property and refinancing, with the bridging loan being used to bridge a financial gap whilst waiting for a property sale to complete or whilst waiting for a long term finance facility to be put in place. The later is often because a property being used to provide security for a long term facility is having improvement work carried out in order to make it suitable security for a traditional lender.
When relying on the sale of a business or property in order to repay a bridging loan it is important to ask yourself how long it is realistically going to take to achieve sale. Questions to ask are how long it will take to find a buyer and then how long will it take for the buyer to complete their purchase. Therefore you will need to consider how long it might take a buyer to obtain the necessary finance, if they are not a cash buyer. It is also a good idea to take into consideration possible delays, such as a buyer pulling out last minute, meaning that you may well be back at square one trying to sell the property or business. In the event that finding a buyer is difficult you may want to consider what price you may have to accept in order to achieve a quick sale and more importantly would you be prepared to sell at this price. If you are not prepared to sell at this price you may want to reconsider taking out a bridging loan in the first place.
The other common exit strategy is refinancing and care should be taken before taking out a bridging facility that your proposed method of long term finance is indeed available. Since the credit crunch lenders are very selective and there are very few guarantees in the world of finance these days. Therefore if you have any doubts with regards to your refinance options you may want to consider other options that are available to you in the event that you cannot secure a suitable long term finance facility.