Bridging loans are generally associated with property purchases, but there are other reasons for applying for a short-term bridging loan.
Most bridging loans are still used to complete property sales. A typical example is when a buyer wants to complete a home purchase, but has not yet completed the sale of their existing house. A bridging loan completes the sale and can be repaid once funds from the sale of the existing house have been released.
Property can often be purchased at below market prices at auctions, but the drawback is that the full purchase price for a successful bid is due in around 28 days. Funds from a long-term mortgage can often take longer than 28 days to arrive which makes it difficult to finance the purchase. A major advantage of a bridging loan is that it can be completed quickly, usually in a matter of days. Bridging finance is ideal to complete the auction property purchase and can then be repaid once the mortgage funds are available.
Many mortgage lenders will not provide loans for property that is uninhabitable without refurbishments. A bridging loan can be used to finance the necessary building work. Once the property is habitable then a standard mortgage can be applied for.
If a business is experiencing a low cash flow, then a bridging loan can be used to pay the business expenses until the cash flow picks up. A bridging loan is often used by businesses that experience seasonal trade dips who know that business will pick up in their high season.
Meeting tight deadlines
Often, businesses have tight deadlines to complete transactions. They may want to purchase bulk stock that’s only available for a short time, or be offered equipment at a bargain price that must be purchased before a competitor seizes the opportunity. Many businesses rely on bank loans for expensive transactions, but these can take a while to be approved and for the funds to become available. A bridging loan can complete a purchase and then be repaid once the conventional loan is finalised.
Many business need to raise short-term capital to finance projects and use bridging loans for this.
Landlords purchasing buy-to-let properties
Landlords with many properties may have assets that are worth a lot, but do not necessarily have access to large amounts of cash. This makes it difficult to quickly raise the money for a deposit on a new property. Multiple properties can be used as security for a bridging loan to rapidly purchase property without the immediate need for cash.
Security and exit strategy
To apply for a bridging loan requires a clear exit strategy, which is a plan for when and how the loan will be repaid. The loan is usually secured with property, but some lenders will consider other business assets.
The bridging finance industry has come a long way from the days when bridging loans were almost entirely used to complete house purchases, and is now seen as a flexible and responsible way to access short-term funds.