Bridging Finance Considerations
Bridging finance is a short term method of borrowing that has many uses and also advantages over other forms of finance. However bridging finance is a short term method of finance and should not be considered as a long term option or solution.
There are many occasions when short term finance is required, for example when buying and selling a property and there is a time gap in the sale chain, or when purchasing a bargain property which you intend to sell on, or flip, for a quick profit. Bridging finance usually has a high monthly rate of interest, hence one of the reasons as to why they are not a suitable long term method of finance, but many bridging loans do not have any exit or early redemption fees.
When buying a bargain, or other times when funds are required just for the short term, it is also common that the funds are usually required quickly. Another advantage of bridging finance is that they can be put in place quickly. Although 24 to 48 hours is possible, 5 to 14 days is more usual and when considering bridging finance the time scales should be remembered.
Before taking out bridging finance it is very important to have a plan about how the bridging loan will be repaid. An exit strategy is crucial because not having a reliable one could prove to be a very expensive mistake. Typical exit strategies usually involve the sale of property, refinancing for a more suitable long term finance option or receiving repayment for money owed. It is important to look at any exit strategy to see how safe it is. For example is the refinance option viable, especially since lending criteria is more stringent these days. What would happen if the refinance option was to fail? If repaying the bridging loan is dependant on the sale of a property what if the sale falls through? Have contracts already been exchanged or are you still looking for a buyer? If the property had to be sold quickly what would be a realistic sale price and with that in mind is the whole project still financially viable? If the bridging loan is going to be repaid through the repayment of a debt, how sure are you that the debt will be repaid to you? What if it isn’t, do you have other options?
Many bridging loans offer a facility that allows for the monthly interest costs to be added to the loan. This therefore means that monthly payments do not have to be made each month, but are paid at the end of the bridging agreement when the monthly interest payments for the period of the bridging loan are added to the redemption figure.