Although the majority of bridging loans are property related, many loans are arranged for nonproperty purposes.
The development of bridging loans
Most people are familiar with bridging loans being used to break housing chains. Often, someone wants to move into a new home but has not sold their existing one, which they are relying on for the whole or part of the purchase price of the new home. Bridging finance can be used to provide the funds to complete the purchase of the new home, then repaid after the existing home is sold. This arrangement is why bridging loans were first created.
The use of bridging loans has been extended to other property deals. Loans are provided for redevelopment and refurbishment work. Bridging loans are useful for completing purchases of property bought at auction, which are normally required to be complete 28 days after the auction.
In recent years, the scope of bridging finance has widened to also include many nonproperty related reasons. Here are three of them:
VAT is charged on commercial property purchases. The 20% VAT rate means that the VAT on a property can be many thousands of pounds. Companies registered for VAT can claim this back at the time of their next VAT return. The VAT return date could be up to three months after paying the property VAT. For some companies, this can mean a severe cash flow problem until the VAT is refunded.
There are bridging loan lenders who will provide a loan for the period until a business’ next VAT return, and this loan can be arranged quickly.
After a death, the executors may have to pay inheritance tax. This is usually paid from the assets of the estate, but often the assets to pay the tax are not in cash, but large value items such as a house or jewellery. In this case the assets need to be sold to pay the tax bill.
Inheritance tax must be paid by a set date. If assets have not been sold by this date, the executor may be tempted to sell them cheaply to make a quick sale. A house may be on the market for a while before a buyer is found.
A bridging loan can be used to pay the tax. After the assets have been sold – hopefully at their full market value – the loan can be repaid.
Many businesses at times need short-term capital. This could be to purchase equipment, stock or materials. Many businesses have low seasons where turnover is small, and high seasons when sales pick up. A bridging loan can provide loans for many business purposes.
Applying for a bridging loan
To apply for a bridging loan, whether for property purposes or not, you will need security (normally property) and an exit strategy, which is when and how you can repay the loan. If you have these, talk to Ascot Mortgages who will approach one or more suitable lenders on your behalf to arrange a short-term flexible bridging loan.