With lots of financing options to choose from, it can be challenging to figure out which one will bring the most benefits to your business. Some may take a while to process before the fund is released, while others do so instantly. Bridging loans are one of the commercial products that are gaining popularity among business owners and investors.
So, what exactly is a bridging loan? Why should you consider getting one, what are the benefits of such funding and how is this type of loan processed?
This article addresses these concerns to educate business leaders like you about this type of financing alternative.
What’s a Bridging Loan?
A bridging loan refers to a short-term loan for businesses. This financing option ensures that the funds are received quickly, making it the perfect option for those who want to invest instantly after an opportunity presents itself.
Normally, bridging loans require assets as collateral. There are many bridging loans uses, including bridging a financial gap and supporting a business during a financial transition. However,after a more permanent form of financing is found, the bridging loan should be paid fully.
In the past, bridging loans were aimed at funding property purchases, property development, or buying auctioned properties. This was because a logical commercial purpose reassured the lender that they would get their funds back. However, a bridging loan can be used for various purposes, not necessarily property-based.
Why Should You Consider a Bridging Loan?
Acquire New Property
If you want to use the proceeds from the sale of your old property to buy a new one, you may want to consider a bridging loan. A bridging loan can help you bridge the gap by providing the finances needed to complete the purchase of the new property. Following the completion of the sale, the money is then utilized to repay the loan.
In this case, a bridging loan is beneficial since it allows you to proceed with your investment plans with ease and avail of special discounts and offers that are time-bound. The money you require is provided with the option of repaying later at lower interest rates than traditional loans.
Expand Your Business
A successful real estate investor must be the first to act when an opportunity arises. However, if finances are locked up somewhere else, this can be problematic. Expanding the business may take longer than expected. As a result, they are forced to work with funding agencies that process funds quickly.
Traditional mortgages typically take a long time to release funds. Thus, they may not be the best option for you if you need immediate funding, since the lengthy processes may cost you a once-in-a-lifetime opportunity.
Fortunately, a bridging loan is more suitable when purchasing a commercial property because the funding can be completed in five working days. This allows you to remain competitive with a loan that takes only a few days to process.
Bid For Auctioned Properties
Following a successful auction bid, a 10% deposit is required to secure the property, with the remaining amount due in 28 days. You need a loan that can be issued and approved fast because you only have a few days to complete the payment.
Thus, a bridging loan can be advantageous because it just takes a few days to process, allowing you to complete the payments on a property auctioned within the required days.
Pay for Renovations or Refurbishment
Traditional lenders may be reluctant to provide you with financing for property improvements because they presume that its current condition makes it ineligible for mortgage purposes. A bridging loan is a good alternative in this instance because minor refurbishment and reconstruction take less time.
Opting for bridging finance for renovations or refurbishments may be useful if you are a property developer who plans to improve the aesthetics of your property or add facilities and amenities before renting it to tenants.
Because the bridging loan is easily arranged, it is simple to fill the funding gap and repay later after a traditional mortgage is secured when the project is completed.
Meet Business Deadlines
As previously mentioned, traditional long-term mortgages take time to process. In fact, a simple mortgage application may take a month to get approved and secure the required funding. This can lead to you potentially losing deals due to failure to raise the required funds before a particular deadline.
In this scenario, a bridging loan can cover the funding required between the purchase of a property and the completion of a long-term mortgage. After you have procured the traditional mortgage, the funds can be used to repay the bridging loan.
How is a Bridging Loan Processed?
Before deciding to apply for a bridging loan, you should be aware that the lender will require you to provide an effective exit plan before giving you the money, like selling a property, remortgaging, or any method that guarantees the lender that you can successfully repay the loan.
Bridging loans are short-term, and you, as the borrower, don’t necessarily have to make monthly repayments. However, the full amount should be completed at the end of the agreed term.
Bridging loans involve certain steps that include the following.
Step 1: The broker will conduct background research on you as a borrower to determine your current work position or evaluate the status of the business following the loan inquiry.
Step 2: The broker will then request that you outline your exit strategy and provide supporting documentation.
Step 3: After assessing the situation, the broker will locate a suitable lender and approach them for an agreement in principle. However, some brokers skip this step and instead use a full direct application.
Step 4: Following the completion of the underwriting process, you will be presented with a conditional offer. In contrast to a traditional mortgage, a conditional offer is not legally binding and is subject to the approval or conditions set by a legal practitioner.
Step 5: The bridging loan application is then forwarded to the lawyer for completion
After this process is completed, you will receive your loan quickly, especially if you are working with a competent and knowledgeable bridging loan solicitor.
A bridging loan is a kind of funding that processes and lends you the required funds quickly. In case of a property emergency, a bridging loan ensures that you get the funds within a short time hence bridging your financial gap. With the information provided in this article, you can make an informed decision on whether this type of funding is ideal for your needs.