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Is it risky to use bridging finance for my business?

Is it risky to use bridging finance for my business? 40

Bridging finance can be a way of financing projects under a tight deadline or to purchase something with the intention of selling upon exit. This type of funding is usually secured and is only used for short term purposes, so it is important to understand the risks to you and your business.

What is bridging finance?

A bridging loan is a type of financing which can help you pay for something new while waiting for funds to become available from selling something else. The idea is that it ‘bridges the gap’ and allows you to fund projects in the interim.

Depending on the type of loan, this could be regulated if it is against someone’s primary residence, but some activity is not regulated, based on the mortgage credit directive.

Many individuals or businesses choose this option for real estate if they want to buy a new property or do work on a property whilst waiting for the sale of their existing property to go through. They are a type of secure loan via which a high value asset, such as property or land, needs to be put down as collateral.

How does bridging finance work?

There are two different types of bridging loans: ‘open’ and ‘closed’ and the key difference is the repayment date.

With open bridging loans, there is no fixed repayment date but it is usually understood that the loan will be paid back within one year. Closed bridging loans, on the other hand, have a fixed repayment date. You will usually receive a closed bridging loan if you have already exchanged contracts but are still waiting for your property sale to complete.

Bridging loans allow you to borrow anything between £50,000 and £50 million but the exact amount will depend on how much available equity you have. Generally speaking, the maximum loan, including interest, will be limited to 75% loan to value. Loans will be secured on the property itself or across multiple properties in order to raise the necessary funds.

You will repay the bridging loan either by selling the property (or properties) or by raising finance via a traditional mortgage. (Source: Octagon Capital)

What are the risks of bridging loans?

Bridging loans are known to be a very expensive way of borrowing funds as they are designed to be for large amounts of money over a short-term period.

Generally speaking, interest rates for bridge loans tend to be quite high meaning that they could be quite an expensive way of raising finance in the long run. In addition to the interest rates, bridging loans can incur multiple different fees meaning that the whole process can add up. (Source: Proper Finance)

With bridging loans, you are relying on longer-term financing. This means that if you go down this route without having a clear or realistic exit strategy in place, it can be very high risk. For example, if you are waiting to sell a property, the worst thing you could do is not have a buyer lined up. There are many different parts of the chain that could fall through; if for any reason that happens, you could be left with a very expensive loan that you will need to pay off over a long-term period. Bridging loans mean that you will pay for any delays or setbacks.

What are the advantages of using a bridging loan?

Bridging loans are a way of accessing large funds relatively quickly and easily. This means that they offer a great deal of flexibility, whatever your financial needs and regardless of the project type. They also tend to have fewer entry barriers than many traditional loans making them more accessible for many. As a result, you may be able to secure lending on properties where high street lenders cannot.

Unlike other loan types, repayment for bridging loans also tends to be more flexible meaning that borrowers can typically have open discussions with bridging lenders about the duration of the loans, especially if the process is dependent on multiple factors.

One of the other advantages of bridging loans is that there are limitless potential applications. Because bridging loans can be used for any purpose, you will not need to be extremely specific when approaching lenders, unlike with some banks and more traditional lenders.

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