Financial education 101: what are bridging loans?

Individuals and businesses can find themselves in need of short-term funding in all sorts of situations: whether it’s for buying a property, getting a new build or other business project off the ground, or meeting refurbishment costs.

In situations like these, there are a number of options available for gaining the funding fast, but an increasingly popular one is the bridging loan.

As the name suggests, a bridging loan is designed to bridge a specific funding gap. Here, we take a closer look at this specific type of short-term finance — and highlight how a bridging loan can help property professionals put their project plans into practice.

Bridging loans: what are we talking about?

Outside the world of professional property development, bridging loans have long been a go-to means of keeping property purchases on track when snags occur. This covers the classic “broken chain” scenario: if the sale of their property is held up, the owner uses a bridging loan as a short-term fix to complete a house purchase. This loan is repaid once the funds from the sale eventually come through.

But bridging loans aren’t just for fixing broken chains. The characteristics of this type of loan mean that bridging finance provides a useful option for developers and entrepreneurs who find themselves faced with a temporary funding gap. Here are some of the reasons why:

• Flexibility on the size of the loan
  

  A bridging finance arrangement is a secured, interest-only loan (the property provides security for that loan). The loan could be a for a relatively small sum, for example £50,000 – which is great if you’re a SME developer and finding many High Street lenders won’t consider lending anything under £1m. Although, bridging loans can also be for larger amounts - such as £50m.
  
  
• Fewer barriers to lending
  Traditional lenders are often unwilling or unable to offer finance unless the condition of a property meets a certain standard. This can cause particular difficulties for professionals who want to buy and renovate an uninhabitable property. Bridging lenders are typically much more willing to make lending decisions on the current value of the property — even if the property needs a lot of work.
  
  
• Quick decisions and rapid access to capital
  Although credit checks and property value assessments are part of the process, arranging bridging loan finance doesn’t involve the same intensity of gruelling affordability and stress-testing checks that mortgage providers have to go through. This means things can move quickly - and in fact, here at Enterprise Finance, our typical turnaround time from initial enquiry through to completion is just two weeks – but can be in some cases as little as three days.
  
  

• No penalties on early repayment
  

  Typically, property professionals look for an ‘open bridge’ loan. With this, there is no definitive date on which they think everything will be tied up. However, there is a cut-off point by which the loan will need to be repaid. On most loans the cut-off point is around 12-18 months – although some unregulated bridging loans can last up to two years. Crucially, there is generally no penalty for early repayment, meaning you can pay it back whenever the job’s done.

How bridging loans can help property professionals?

 
So how exactly can bridging loans help? Here are some of the situations where fast, flexible, short-term finance can be especially beneficial.

Auction purchases

If you have just bought your target property at auction, the deposit is generally payable immediately – with the balance payable within 28 days. Traditional lenders can take their time to process applications – so this timetable can prove tight. Bridging finance can enable you to seal the deal while you wait for your development finance lender to finalise arrangements.

As we’ve seen already, bridging finance provides a useful funding option in the case of non-mortgageable properties (e.g. those that are uninhabitable), giving you the financial backing you need to get them up to scratch for longer-term finance. Also, the “broken chain” scenario can affect property development businesses and private buyers alike.

In fact, whatever your specific circumstances, if you need a short-term cash injection to fix a snag or prevent you from missing out on a development opportunity, don’t overlook bridging finance as a possible solution.

Purchasing before planning permission is granted

To issue development finance, lenders very often want to see planning permission in place. If you’re confident that permission will be granted but it’s yet to be “rubber stamped”, bridging finance can offer a stop-gap solution. You can switch to a longer-term development finance once that permission is granted.

A cash injection to boost your working capital

During renovation and new build projects, businesses can find themselves faced with cash flow issues – sometimes triggered by an unforeseen need to purchase additional equipment or draft in extra help. A bridging loan can be the ideal vehicle to help you meet this need.

If you’re still not exactly sure what a bridging loan is, take a watch of this short video.

For a chat on bridging finance, a meeting to discuss opportunities, or just talk over that more complicated deal on your desk - give our experienced team a call today on 020 8731 5333 or drop us a line.