“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.
Despite their special characteristic of speed (i.e. bridging loan underwriters tend to know the specific kind of property they can accept all day long), there are times when a bridging loan is not actually a bridging loan at all. Let’s identify one of those situations when you think you are requesting a bridging loan but, in fact, you are actually asking for something else.
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.
Most of the time bridging lenders can identify which transactions are ideal for them and which are not but this is not always the case. Below is a good example of this. Imagine the following transaction is yours, and it is one that could easily net you 450,000 pounds, and there would be relatively little work involved.
* Prime Location property (think Central London)
* A property with a current high value (in excess of 5 million pounds)
* And plenty of “skin in the game” on your part as the borrower (see yourself with a minimum of 2 Million)
So tell me, what more could a lender want from you? Surely a transaction like this is the ideal bridging loan isn’t it?
It is close but not quite perfect.
The most important element is missing and that element is the Exit Strategy.
Without a clear, defined and all-but-concrete exit strategy, what does the bridging loan transform into? It moves from being a bridging loan to being “equity participation”. In less technical terms, what started off as a loan to you changes into an investment by the lender who is now hoping that he is able to profit from the sale or refinancing of the property.
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.
If a borrower does not have a buyer ready to close the project or an established agreement in principle to refinance, then it is possible the borrower will find it very difficult to get the bridge finance fast enough for the current market. If the exit plan is not solid, one that is almost guaranteed will suffice, but anything less than that can be dangerous for the lender.
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:
If I give you a bridging loan, how will you repay me easily and quickly?
Pay a visit now to the Bridging Loan Direct website to learn more about bridging loans and other aspects of short-term finance. Even better, go and speak to one of their trusted bridging loan advisers
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