Characterised by its speed, simplicity and flexibility, bridging finance can also be uniquely cost-effective. With interest rates often dipping below 0.5% per month, prompt repayment can keep borrowing costs to the bare minimum.
Funds raised with a bridging loan can be used for any legal purpose, and can be organised in just a few working days. Ideal for time-critical purchase and investment opportunities, bridging finance offers a fast-access alternative to a conventional High Street loan.
There are two main categories of bridging loans available – closed loans and open loans. Selecting between the two options means considering your exit strategy, or lack thereof.
Closed Bridging Finance
A closed bridging loan is issued to a borrower who knows exactly when and how they will repay their debt in full. This means having an ‘exit strategy’ in place – a means by which the funds required to repay the loan will be raised by an agreed date.
For example, property developers and construction companies often use bridging loans to fund their projects. Upon completion of the project, the development may be sold to raise the funds needed to repay the loan. In which case, the sale of the property within a specific time period is the client’s exit strategy.
Another common example of an exit strategy is transitioning from a bridging loan to a longer-term mortgage or commercial loan. A new loan is taken out to repay the bridging loan, and the balance is repaid over the course of several years.
With a closed bridging loan, the lender has a near-concrete guarantee of prompt repayment by an agreed deadline. The borrower has presented evidence of their capacity to repay the loan, making it a low-risk transaction in the eyes of the lender.
This can lead to preferential rates of interest and reduced overall borrowing costs, as the lender is not taking a major risk by issuing the capital.
Open Bridging Finance
With open bridging finance, the applicant is unable to provide evidence of a clear exit strategy at the time. They acknowledge and understand their obligation to repay the loan, and have complete confidence in their capacity to do so. However, no fixed date for repayment can be provided.
In this case, it could be that a developer does not know exactly when their project will be complete. Likewise, they may have a fixed completion date for the project, but have not yet found a suitable buyer.
Scenarios like these call for a more flexible agreement, though are considered higher-risk loans by bridging lenders. In order to qualify for an open bridging loan, lenders will expect to see extensive evidence of the borrower’s track record and general financial status.
In most instances, an open bridging loan will attach elevated monthly interest rates and higher overall borrowing costs. As interest on a bridging loan is charged monthly, the overall cost of the facility increases with the length of the repayment term.
Your broker will provide the representation you need to negotiate a competitive deal if you are unable to provide formal evidence of an exit strategy at the time of your application.
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