When you apply for a bridging loan, the lender will want to see a detailed exit strategy. This is a plan for when you can repay the loan and how you will raise the funds for this. Without a good exit strategy, the bridging loan application will be turned down.
Most bridging loans are secured by property. Many people buying a new house are dependent on selling their existing house to raise all or part of the funds to buy the new home. If there are delays in selling the existing home, this can mean that there is not enough money to purchase the new home by the completion date. A bridging loan can be used to complete the purchase then repaid after the existing house has been sold. In this case, the exit plan is based on the sale of the existing home.
If you have a buyer for the home, then provided the buyer remains committed, the sale of the old house should go smoothly and the loan be repaid in time. If a buyer has not been found, or the buyer pulls out at the last minute, the home must be sold on the open market. The seller needs to research the local housing market. Are houses selling quickly? Do you have a reliable estate agent to handle the house sale?
It is crucial that the home is sold before the bridging loan period runs out. If it is taking a long time, then the price can be reduced for a quick sale, or it can be put up for auction with the risk of selling below the market price.
If your exit strategy is based on selling property, you need to know that the property is likely to sell within a few months.
Commercial exit strategies
If a business or self-employed person owns property and has sufficient equity in the building, it can be remortgaged to release finance for the business, but this can take a few weeks to arrange. If a business needs the money quickly, a bridging loan can be useful. In this case, the exit strategy is sound – as soon as the remortgage funds are available, the bridging loan can be repaid.
Sometimes a business requires funds because of low cash flow. Property is usually used as security for the loan but repaying the funds does not have to be through selling or remortgaging property. Low cash flow could be because there are many outstanding invoices that are awaiting payment. A good exit strategy, in this case, includes a plan for how the outstanding debts will be collected. This could be through selling the debt to a collection agency.
Lenders will also consider exit strategies based on the sale of shares, equipment or other assets that the business owns.
Applying for a bridging loan
After you have created a good exit strategy and have documentation to support it, talk to Ascot Mortgages who will arrange bridging finance based on your exit strategy.