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Applying For A Bridging Loan: What You Need To Know Bridging Loan

One way of securing immediate cash flow is through bridging loans, also known as temporary funding, gap funding, or swing loans. Unlike other borrowing forms, requesting bridging loans is more straightforward and usually completed within two weeks. 

Learn more about what is a bridging loan

However, short-term finance is often costlier than longer-term lending. Consequently, a higher interest rate and collaterals are often required before securing bridging finance. 

Failure to repay a bridging loan is likely to lead to repossession and severe adverse cost effects. 

Despite risks involved, the majority still choose bridging finance because it is a unique, versatile, and protected financial means that provides borrowers with the quick cash infusion they need, which they may not have been able to obtain elsewhere within a short period. 

Reasons for taking bridging loans include:

  • Quickly renovating a home to then sell on
  • Buying at auction
  • Paying a tax bill
  • Financing a new startup or business
  • As an alternative to invoice finance
  • Settling a divorce
  • Extending a lease
  • Refinancing other loans
  • Covering unexpected business expenses
  • Preventing repossession 
  • Purchasing a stock or machinery for a business

TYPES OF BRIDGING LOANS

There are two major types: 

  • Closed bridge: Lenders tend to prefer this type of loan because it offers a higher percentage of loan repayment guarantee. The date for repaying the loan is a fixed. Additionally, the interest rate for closed bridging loans is lower than that of open bridging loans.
  • Open bridge: Borrowers tend to prefer this loan type whenever they are not confident that projected funds will be available. Unlike in closed bridge, the date for repaying the loan is not fixed. Hence, most bridging companies charge at a higher interest rate and deduct the loan interest from the loan advance for security purposes.

More on open vs closed bridging loans

PREREQUISITES FOR FAST BRIDGING LOANS

  1. STABLE EXIT STRATEGY: 

An exit strategy discloses how you intend to reimburse the loan. 

This is significant since the lender needs to be convinced that you plan to repay your loan and also have the means to do so. 

On the off chance that you have a sound exit plan, you are bound to get to your financing promptly and accomplish economical rates. Should you intend to sell the property as your exit plan, at that point, valuations might be needed to evaluate whether this will produce adequate funds to cover the advance. 

A few loan specialists will demand to see an arrangement on a fundamental level ahead of time, and the clearer and feasible your accounts are, the easier it will be to acquire one.

2. TYPE OF BRIDGING LOAN: 

There are two types – regulated and unregulated. 

All activities involving regulated bridging loans are under the Financial Conduct Authority (FCA). They are generally offered to persons who need credit for a private property they live in or want to live in. 

These credits typically take more time to orchestrate than unregulated, mainly if the legal representatives are inexperienced in bridging finance.

Unregulated bridging loans, on the other hand, are used to portray the business or commercial bridge lending.

3. STONG CREDIT SCORE: 

While boasting of strong credit scores will boost your chances of securing fast bridging loans tremendously, numerous lenders prioritize meeting other criteria as the basis for their decisions. 

Having a dependable and reliable exit plan will catapult you to the top of the list, even with bad credit. 

4. TYPE OF PROPERTIES BEING PURCHASED: 

Different lenders have various necessities regarding the sorts of property they are for or against, which will dictate whether they give out the loan or not. 

The arrangement will be less convoluted if you have a decent security property prepared to sell and is probably going to be offloaded for the necessary sum. 

A few loan specialists won’t loan against properties they believe is of high risks, such as semi-business properties. Factors such as non-standard edifice, leaseholds, and bothersome areas may put off purchasers and endanger the exit.

5. MARKET EXPERIENCE: 

If you can demonstrate you have a solid history in the business and can show proof of past undertakings, many loan specialists are bound to be persuaded that you’re a generally safe borrower, and you are probably going to think that it’s simpler to accomplish serious rates and pivot a quick connecting money offer.

THE BRIDGING LOAN PROCESS

  • The lender (mostly bank) is provided with a summary of the deal, reasons for wanting a bridging loan, the security available, and a clear repayment strategy.
  • Bank sends an offer letter setting out their valuation of your current security, terms of the proposed financing, and what needs to be done to secure that fund. The valuation report and other documentation will be submitted to your lawyer.
  • Your lawyer shall clarify the terms and conditions of the loan, after which you will sign all necessary documents.
  • Your lawyer will receive the bridging loan for legal clarification and then send it to you.

PROS OF BRIDGING LOANS

  • They are ideal when funds are required urgently since applications are usually finished in less than two weeks.
  • They can be used to raise capital where cash flow is tight, but have the assets to comfortably repay the loan, as there are often no monthly reimbursements to make.
  • Due to the competitiveness of the bridging loan market, there is a reduction in interest rates.
  • Properties can be bought without a deposit where the properties are undervalued.
  • You can reimburse the bridging loan as many times as possible until you sell your property to minimize your interest bill.

SHORTCOMINGS OF BRIDGING LOANS

  • Failure to sell your home in the required time may result in the bank taking over your home.
  • You could be left with a more extensive ongoing loan amount, which could put you into financial difficulty if your property sells for less than you expected.
  • Payment of charges for the extra loan as well as two property valuations fees for your existing and new properties may be required.
  • Your interest will continuously accumulate with every delay in selling off your property
  • Payment of early exit fees to change loan lenders.

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