If you’re unsure about how bridging loans work and whether it’s right for your business read on for our helpful guide…
What is a bridging loan?
A bridging loan is used as an alternative to accessing funds quickly over a short period of time. It is a loan that is always secured against a property asset.
A bridging loan is a short-term flexible alternative. The phrase comes from the term ‘bridge’ which effectively means that you are ‘bridging’ the gap between buying a property whilst waiting for the previous one to sell. In desperate circumstances, a bridging loan can be used as a short-term loan.
Tired of waiting for your current address to sell?
How does a bridging loan work?
Bridging loans are fairly similar to regular loans, however, a bridging loan can be ready within 24 hours whereas a regular loan can take months to be ready.
A lender will have access to the summary of the deal applied for – this will include the reason for wanting a bridging loan, the repayment structure and what security is available.
After that the lender will be sent evidence (if approved) which will contain the information about the property in mind and what the approximate price is.
The lender will then distribute a letter to the client with the terms and conditions of the finance requested it I will also include instructions of what must be done to access the finance.
Once this has been done the lender will then inform a valuer who will then create a valuation report which will be sent (along with all documents) to a solicitor who will explain the terms and conditions. After that all documents will be signed by all involved.
Funds will then be sent to the solicitor who will confirm legal completion after that is done the funds will be sent to you.
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Who uses a bridging loan?
Bridging loans are mainly aimed at landlords and property developers, however, those who are wealthy or are current asset-rich borrowers are able to apply for a residential bridging loan.
What paperwork do I need to produce for a bridging loan?
The bridging lender will require a summary of the deal with reasons for wanting a bridging loan, the security available and strategy for making repayments.
They also require evidence of the new property purchase price and the fact that it has been purchased. A valuer will be instructed to provide a report. The documents, including the valuation, will go through your solicitor for you to sign.
Can I use a bridging loan if I have bad credit?
Yes, a bridging loan can be approved – even with bad credit, however, it is always worth seeking financial advice beforehand. Consult with a finance broker before signing up to anything.
It is normal for those with a history of poor credit to be in doubt when it comes to alternative finance options like many things you will never know unless you inquire.
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What are the pros and cons of a bridging loan?
Pros of a bridging loan
- You could access the funds within 24 hours
- You are able to purchase the property in mind before the current one has been sold
- You have the option to pay the loan back before the agreed date
- A bridging loan releases the developed equity and asset value
- Unlike other loans, there is no long-term repayment obligation
- You will have the ability to raise capital for future investments
- A bridging loan reduces the risk of a chain collapse within a property purchase
Cons of a bridging loan
- The short-term repayment method can cause you issues because it might not be long enough
- Lenders are reluctant to be flexible
- If the repayment is late then the lender can add larger fees and penalties which will make the payments larger and harder to pay off
- The loan relies on a permanent finance agreement which has to be available – this is never guaranteed
- If the lender experienced a financial difficulty then the funding could fail
Is a bridging loan the right choice for my business?
If you are unable to sell your current building straight away and are desperate to move into a new building – whether that be because your business is expanding or shrinking then a bridging loan is the best solution for you. You are able to move whilst wait for your old address to be sold.