It cropped up at the recent Finance Professional Show, where experts from across the short-term finance industry were discussing the importance of an exit route for borrowers, with one saying a “surprising number” of intermediaries were calling about bridging finance for their clients, without them fully understanding the importance of how they would repay the loan.
It’s important for brokers’ clients to know exactly how they plan to pay off their loan as early as possible before the 12-month loan period is up. So, bearing this in mind, we’ve put together our top three exit strategies for bridging loans.
Sale of a property
By far the most common way to pay off a bridging loan is through the sale of an existing property. Clients can take out a bridging loan to help them buy a new property at auction or to break a stubborn housing chain. Alternatively, they may want to purchase a new business property now, with cash, while waiting to sell their current property. In both scenarios, they would use the proceeds to pay off the bridging loan on completion. They could also take out a bridging loan to buy and refurbish a new property before selling it for a profit within the loan period.
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Conversion to long-term financial arrangement
We often approve bridging loans for borrowers looking to buy a property through an auction process. In such instances, winning bidders are required to act fast, paying a 10% deposit immediately, before paying the remaining cost of the property within 30 days.
Unfortunately, most traditional lenders can’t approve a mortgage in such a tight timeframe, taking on average eight to 12 weeks to deliver the required funds. As a result, many auction buyers can take out a short-term bridging loan instead. This can be approved (with funds received) within 28 days, in line with the auctioneer’s payment terms. Then – once the property has been purchased – these owners look to convert their short-term loan into a longer-term financial arrangement, such as a buy-to-let mortgage, using that to repay the bridging loan before interest on the loan starts accumulating.
Redemption of loan with operating cash flows
Many small business owners use bridging loans as a form of short-term finance to tide over their company – for reasons such as paying staff wages or rental costs, or buying new stock to fulfil a big order – while they wait for a large overdue invoice to be paid.
Late payment of invoices is a significant problem among the small business community, with many large customers often enforcing lengthy 60- or even 90-day payment terms on their suppliers, which can be crippling for a small company’s cash flow, causing their operations to grind to a halt. Bridging loans can prevent this by propping up a business over the short term, with the loan paid back in full once the overdue invoices have finally been settled.