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How businesses can use bridging finance to raise money

A form of finance which is rapidly gaining popularity in the UK business market is bridging finance. Around £750 million was borrowed through the means of bridging in the year 2011, since then it has only gone up where in 2016, this number went up by £4 billion.

The way bridging loans work is that they allow a business (or an individual) to access large sums of money within around 2 to 4 weeks.

Just like the name suggests, the loan is designed to ‘bridge the gap’ of financial opportunity which would be more expensive if you were to wait much longer for a traditional loan or mortgage.

The growth in the industry has emerged from a stricter criterion over the years by mainstream banks as well as the emergence of 40 bridging lenders who have quickly been able to establish a competitive environment for the UK bridging market to thrive.

What is Bridging Finance?

Essentially, bridging finance is type of short-term finance which is designed to appeal to those who have a strict deadline to meet. As mentioned, you would choose to apply for a bridging loan when other financial assets may too long to get your hands on or they are simply unavailable.

Typically, the amount you can borrow ranges from around the £25,000 mark to as much as £25 million.

Due to the short-term nature of a bridging loan, the length given on the term of the loan is usually only around 3 to 12 months. In some cases, companies may offer you 24 months – this is usually reserved for larger sums of money.

The Typical Terms

With a bridging loan, the applicant is expected to put down some form of security as collateral should the applicant fail to make their repayments.

What you put down as collateral will be present in the agreement between you and the lender. For businesses, the things that are usually put down on the contract are:

  • Property (Estate)
  • Premises such as office and office equipment and furniture
  • Their own business – stakes in the company
  • Client invoices and sales

The terms of bridging loans state that you should pay off the loan and the interest in its entirety, otherwise you would be at risk of severely losing out and having your property repossessed – although this is quite rare and commonly customers will ‘re-bridge’ under different terms.

As a borrower, you will typically have the option to pay off the loan in monthly instalments, interest only or rolling up the interest until the loan term ends.

Usually, a standard interest rate that is charged by lenders ranges from 0.59% to about 2% per month (Source: MT Finance).

Be aware that on top of this will be additional fees such as a 2% broker fee and administration fees. Ultimately, the amount you will pay will be unique to the lender you go with.

When might you use a bridging loan?

The most common reason a business owner may take out a bridging loan is for property development. Say that a property developer wants to reconstruct or redecorate a house in order to sell it for a larger price, then it goes without saying that they will need a sum of money to be able to carry this out.

The property developer could go down the traditional route and take out a mortgage, but this could take several weeks to be approved by a lender.

The other option is a bridging loan which will offer than a quicker means of attaining the money they need to make a profit on the property for sale.

Elsewhere, companies will consider bridging finance to fund a growth period. For a company with its own offices, it can secure the loan against the premises and uses the finance for extra staff, inventory and advertising. Once they have generated more revenue, the loan can be repaid.

Opportunities in stocks and investments may be a reason to take out a bridging loan. This will hopefully help an individual maximise their returns, but they just need that little bit of financial aid.

Source: Byte Start

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How long is the average bridging loan term?

Recent reports have revealed that the average bridging finance term is getting longer.

Why is this? And how long does it take to get a bridging loan?

The average bridging loan now lasts a year

According to a recent report by Bridging Trends, despite a bridge being ‘short-term finance’, the average bridging loan now has a duration of 12 months.

Traditionally, bridging finance was sold as ‘up to 12 months’, so these findings could indicate that lenders are taking greater advantage of the maximum terms available to them.

How long does it take to get a bridging loan?

The research also revealed that, in 2017, the average bridging finance loan took 43 days to complete. This was down from 45 days for the previous period.

It’s important to recognise this is just an average and completion times can vary greatly. Here at Pure Commercial Finance, we’re known for sourcing fast finance and have completed deals in mere days in the past.

Why are bridging loan terms increasing?

Greater competition

With bridging finance increasing in popularity, more and more lenders are entering the marketplace.

That means there is more competition and lenders are having to work harder to stand out from their competition. One such way of doing this is by offering longer terms of up to 48 months.

An uncertain property market

With Brexit looming, some areas of the country are feeling the effects of an uncertain future with the property market slowing slightly.

This means some properties are taking longer to sell and as a key component of any loan is to lend against a property that has a realistic exit, having an achievable time to secure this has resulted in some lenders extending terms to reflect this requirement. This in theory should prevent borrowers defaulting on their loans when their property fails to sell as quickly as they may have hoped.

More flexible specialist lending

It’s no secret that specialist lenders can be more accommodating than those on the high street.

These lenders are more likely to take the time to look at the individual circumstances of a case and bend their criteria in order to help the borrower wherever possible.

That means, if you are an experienced borrower with a large deposit and clear credit history, a lender may extend the parameters. The average bridging term is affected as a result.

Source: Bridging and Commercial

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Bridging opportunities in 2018

Despite the doom and gloom predictions following the Brexit referendum, the UK economy has demonstrated its resilience by continuing to attract private investment across both alternative and traditional sectors.

The bridging sector has benefited from this strong performance – gross annual lending totalled £4.6bn in Q3 2017, and more than half of brokers are positive about the outlook for the sector in 2018.

By offering investors the chance to overcome mortgage delays and potential gazumping, the bridging market remains an important source of finance for those seeking to take advantage of property investment in a market abound with opportunities.

The rise in bridging activities comes amid figures released by UK Finance in January 2018, which showed that 36,115 mortgages were approved in December 2017, the weakest level since April 2013.

The data led Samuel Tombs, chief UK economist at Pantheon Macroeconomics, to remark how traditional home loans were “falling off a cliff”. Against this significant trend, the steady rise in bridging loan volumes can be expected to continue.

Looking beyond industry statistics, there are two other factors that will determine how the bridging market will perform in 2018. The first is investor confidence – namely, their confidence and willingness to invest capital in UK-based assets.

The second is the underlying performance of the property industry, measured through the volume of transactions, house price growth and the level of market demand across both the country’s commercial and residential markets.

A high-performance property market supported by a confident investor community will likely have a positive effect for bridging providers. Industry figures suggest 2018 will be a year full of opportunities for the bridging sector, projecting its appeal to both investors and borrowers.

An investor survey among more than 2,000 UK adults by Market Financial Solutions (MFS) at the beginning of the year revealed that 77% of investors are not concerned by the long-term impact of Brexit of their investment strategy, while 63% consider property a safe and secure asset in the current market.

What’s more, with average UK house prices still creeping up and the volume of commercial property investment likely to exceed £50bn this year, the determining factors are clearly in favour for bridging.

Outside of London, cities such as Manchester, Liverpool, Leeds and Birmingham are offering fantastic opportunities; bridging ensures buyers are able to act quickly on their property investment intentions, allowing them to avoid stringent lending regulations imposed by high street institutions.

Source: Mortgage Introducer

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What makes for a great bridging lender?

Bridging finance is a specialist form of short-term lending designed to assist homeowners in securing their dream home, construct new builds and buy land.

As it grows in popularity, more and more brokers are interested in offering it to their customers. But bridging isn’t a simple product, so it’s crucial brokers do their homework before entering this new space.

Over the past few years, bridging loans have moved into the mainstream as a way for people to secure short-term lending to meet a range of everyday needs. However, it is still a specialist, complex product and any broker thinking of incorporating bridging into their portfolio should choose their preferred lender carefully. Here, I give an overview of bridging finance and four things to tick off when you choose who to work with.

Bridging finance

A bridging loan is a form of short-term finance that – as the name suggests – helps borrowers bridge the gap, typically between the sale of something and the purchase of a new thing, such as selling a house and buying a new one, although it is often used for other reasons, as explained below.

Usually, though, bridging finance is often centred around a time window or a deadline. Generally speaking, the customer needs to raise finance quickly so they do not miss out on something – a dream home, for example.

In the wake of the credit crunch, some mainstream banks tightened up their lending criteria, meaning many people found themselves unable to source lending finance from high street names. This gave rise to a number of alternative lenders who directly specialise in bridging.

What people use bridging finance for

• buying a new home before the sale of their current one
• building a house, moving into it and selling their old house (to pay the loan back)
• buying land and building property – either to move into or sell.

Benefits of a bridging loan

• Speed – taking a bridging loan to buy a new property prior to the sale of the current one can be much faster than arranging a mortgage
• Need – bridging loans offer fast access to cash, which is crucial when a payment deadline needs to be met
• Flexibility – bridging lenders often specialise in supporting people with impaired credit, short work histories etc.

What should you look for in a bridging lender?

Speed and precision

As mentioned above, a key bridging USP is that they offer the customer swift access to finance. This is essential if they are, for example, to pay for a house in a very short space of time. So look for a bridging lender with a track record in delivering cases quickly. However, it’s important to note that speed should not be conflated with rushing a case through. The key is to find a lender that can offer a quick turnaround, but doesn’t sacrifice on diligence.

Experience in the industry

As a short-term financing solution, bridging finance is a form of specialist lending. It’s important, then, to work with a lender that knows bridging like the back of their hand – look for lenders with some years of experience or who’ve secured awards for their bridging work. These lenders will know the ins and outs of the industry much more than a traditional lender or a new entrant. Expert underwriters are crucial too – these guys help drive the cases through.

Focus on transparency

In a volatile economic world, honesty holds strong currency. Bridging finance is more complex than, say, a personal loan, so seek out a lender with a strong transparency-first approach. This means being open and honest about fees and charges, yes, but also things like complaints policies, how they assess deals, whether they’re directly funded etc. Openness builds trust, which leads me nicely on to my next point.

Relationship focused

In my experience, some of the most successful bridging deals come off because the parties involved are used to working with each other. They know how each other operate, the kinds of processes they use and the approach they take. This familiarity often results in an excellent result for the customer. If you meet with a lender and can see yourselves working together for a long time, they might just be the one for you.

Source: Bridging and Commercial