When A Bridging Loan Is Something Else in Disguise
“A bridging loan is what we need. And fast!”
This phrase is echoed by property entrepreneurs all over the UK today. Since 2007 the price of properties has fallen significantly, and left the door open for property investors to take advantage of this opportunity. But to make this happen before someone else beats them to the post, they need to have access to money fast and a bridging loan is often the answer.
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.
Generally speaking a bridging loan can be used for almost any purpose the borrower has in mind. These loans are not purpose specific, although they must always be secured against an asset of some description (e.g. property). Their main purpose is to help you secure a deal 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 superb location for a property (e. G. Central London)
*Very high property value (imagine 5 million pounds)
*You are the borrower with over 2 million pounds of property and experience under your belt
Surely this must be the ideal situation for the lender and looks like the ideal bridging loan too. But is it?
Well yes almost.
To make this the transaction ideal, one missing piece must be in place and that missing piece is an Exit Strategy.
If there is no clear and solid exit strategy in place then the loan suddenly becomes Equity Participation. What this means is that the bridging lender thought they had issued a loan but instead it has now changed in to an investment. The lender is now left thinking if he will profit from the sale of the property or not which is not quite the same as a guaranteed payment of interest every month.
This is a good example of what borrowers tend to forget. As a borrower without a firm exit plan, you have made the lender an investor in a project that could potentially go bad. This is your project, not a joint venture with the lender; he does not want to own the property. All he wants is to be paid a fee upfront for the loan and profit from interest charged on that loan. Before you enter into a deal, you must be sure of exactly how you are going to exit the project.
If the borrower does not already have a buyer lined up or any form of agreement in place to refinance, then it is probable that the borrower may find it difficult to get the bridge finance fast enough in the current market. It is extremely important to have a solid plan to close the deal.
Before you actually begin any project you should first consider how it will end. So in the case of a bridging loan, you need to know how and when you are going to repay it. Lenders also want to know that they are entering into a safe deal and to be sure of this they will just ask this question:
“How will I get my money back quickly and painlessly if I give you a bridging loan?
Do you need to understand more about bridging loans? Then pay a visit to the Bridging Loan Direct website or contact one of their associated bridging loan specialists.