Question To Ask Before Securing A Bridging Loan

A bridging loan is a short-term funding solution that provides quick access to funds. It is equally beneficial for individuals and businesses. With the increasing popularity, the number of bridging lenders has also increased, and many p2p lending platforms also offer this type of loan. 

If you are securing a loan for your business needs, you need to be sure that you are choosing the right option for your financial situation and goals. External funding is an invaluable resource that helps you at each stage of your business development, but getting funds at short notice can be difficult. This is where the bridging loan comes in. It helps you get funds within as little as 48 hours of applying. 

However, to find out whether a bridging loan is a right option for you, you need to consider every aspect. Here we describe some questions you must ask when considering taking out a bridging loan. 

How Bridging Loans Can Be Used?  

The best thing about bridging loans that makes them useful for your business is flexibility. You can use bridging finance for a wide variety of purposes. The most common use is buying a property, but you can also use it as an intermediary between two financial products. Businesses can use it to pay wages, purchase new stock or expand a business.  

It helps you fill a financial gap when you are waiting for long-term funding. A Bridging lender does not interfere as long as you are able to repay the loan amount. 

What Type Of Bridging Loans Are Available? 

Bridging loans are a useful financial tool as it can adapt to your current circumstances. Different types of loans are available in the market, and you can choose one that meets your needs. The most common types are open and closed bridging loans. It is essential to understand how they work so that you can make an informed decision: 

Open Bridging Loan

These loans do not have any set a date for repayment. Most lenders want you to repay the loan amount within 12 years. Such loans are perfect for business projects with no specific completion date.  

Closed Bridging Loan 

Close bridging loans have a fixed repayment date. It can be a useful option for your business if you want to buy or purchase a property. For example, when you know the completion date for the sale of your property. 

What Is The Security For Bridging Loans? 

Bridging loans are secured types of loans, meaning you have to put a valuable asset as a security against the loan. Typically it is a property or a piece of land that is accepted as collateral. There are no rigid rules for the type of property like in traditional mortgages. You can use the residential, commercial or mixed-use property. 

When you have a good security property, your lender will have confidence in you, and you can get quick approval. 

How Much Can You Borrow With Bridging Finance?  

There is no limit on the maximum amount you can borrow through a bridging loan. The amount usually depends on the property you use as security value. The maximum loan-to-value offered by most lenders is 75%. If you want to take out a huge amount, you can also use multiple properties as a security against your loan. 

What Are the Loan Terms?   

Bridging loans are short-term loans that usually last between 3 to 12 months. Since bridging finance is a high-interest loan, being a short-term solution is more cost-effective for borrowers. However, some lenders offer loans for a long time. If you want to reduce your interest payment, you should try to re[ay your loan amount as early as possible. 

How To Repay Bridging Loan?  

Another thing that you must know before taking out a bridging loan is how it is repaid. Bridging lenders usually have 3 repayment options for interest, including monthly payment, retained and rolled up. Let's see how all of these options work so that you can choose the right one: 

Monthly Payment:

It requires interest payment each month until you repay all the loan amount.

Retained:

It allows you to borrow interest which is incurred within the agreed number of months.  

Rolled Up:

In this type, all the interest is added to the loan amount, and you have to pay it as a lump sum at the end of the loan term. 

Are Bridging Loans Expensive?  

Bridging loans comes with a high-interest rate, which is why most people consider it as a last resource. The interest rate, however, depends on your exit strategy and credit score. You can secure a loan at a lower rate if you have a strong exit strategy and a good credit score. 

In addition to interest, some lenders impose additional charges such as administration, legal, valuation, and exit fees. All these charges add up to the loan amount, making it an expensive way of borrowing. So it is essential to check these additional charges before you take out a loan. 

Conclusion

Short-term funding options like bridge loans give you immediate access to money. They can be used for a wide range of things, such as purchasing real estate, paying employees, getting new goods, or growing a firm. Bridging loans must be secured. Therefore you must pledge a valuable item as security, like a house or a plot of land. The value of the asset used as security and the loan-to-value ratio that the lender offers to determine how much you can borrow.

 

Although some lenders provide longer periods, bridging loans normally have maturities between three and twelve months. Monthly payments, retained interest, and rolled-up interest are available as repayment alternatives. Before obtaining a bridging loan, it's critical to consider the loan's objective, accessible loan type, security requirements, maximum borrowing amount, loan terms, and repayment choices.