To Be A Bridging Loan or Not To Be A Bridging Loan – That is the Question
“We need a bridging loan to secure this deal and we need to get one fast!”
These words are the battlecry of many a property entrepreneur in the UK right now. The need for a bridging loan or some other kind of immediate finance is vital in the current market. Property prices have seen historic drops since late 2007, giving rise to some first-class opportunities for those that can get access to money quickly.
Bridging lenders normally know what properties they can or cannot accept, this is the very basis of what they do and this knowledge is the foundation of their business. But that said, there are still times when a bridging loan turns out not to be such after all. We are going to take a look at how asking for a bridging loan can turn out to be something much different.
You see, a bridging loan can be used almost anywhere in the world and for virtually any purpose. From Croydon to the Caribbean and for pizza businesses to property portfolios, the bridging loan stands on its own in securing a deal for you – quickly.
Bridging lenders tend to know what is an ideal loan situation for them and what is not. A good example is the following transaction, potentially the deal could make over 450,000 for a small amount of effort.
*A property in an excellent location (e. g. Central London)
*Very high property value (imagine 5 million pounds)
* And plenty of “skin in the game” on your part as the borrower (see yourself with a minimum of 2 Million)
On face value this kind of transaction is what lenders want every day. Surely, this has to be the perfect loan doesn’t it?
It is close but not quite perfect.
To make this the transaction ideal, one missing piece must be in place and that missing piece is an Exit Strategy.
Until this deal has a solid exit strategy set in stone, it is more of an equity participation than a loan. So instead of the lender conducting a simple and safe transaction, he has now inadvertently invested his money. Hoping for a timely and profitable return on the investment, the lender is left wondering if any profit can be made from the sale of the property in order to recover his money.
Borrowers regularly forget this, even though it can prove to be a very costly business mistake for them. it is essential that a borrower has a clear defined exit plan. It this is not the case, the lender has inadvertently changed into an investor, which was not his intention at all. As the borrower, it is you who is seeking to own the property not the lender; all the bridging lender wants is a fee upfront for the loan and interest on that loan.
This is when a bridging loan is no longer a bridging loan. When a borrower doesn’t already have an Agreement in Principle to refinance; or they don’t have a guaranteed buyer to close the project successfully, then that same borrower will very likely struggle to get the bridge finance quickly in the current market. (The exit doesn’t have to be cast in stone. Something close can also be enough. But it does need to be close.)
There is the saying that we should “Begin with the end in mind” when it comes to achieving goals in life. The same can be said of bridging loans because bridging lenders do not want to take a stake in your project, even by accident. They want a simple answer to the following question:
“How will I get my money back quickly and painlessly if I give you a bridging loan?
More articles on bridging loans can be found at the Bridging Loan Direct website. With bridging finance advisers on hand, they will help you get the finance you are looking for.