Are you a developer or a builder who requires finance for an upcoming project? Are you specifically looking for a short term loan that might help you ‘bridge the gap’? In that case, bridging finance might just be the best option for you. Unfortunately, in this world of loans and debts, not too many developers know about the numerous advantages of bridging loans. Here are the top 5 things that you need to know about bridging loans.
First, let’s understand what a bridging loan really is. In simple words, bridging finance is a short term loan that usually lasts for 12 to 18 months. A builder or a developer takes out a bridging loan to secure funds for a short term when needed—basically, bridging loans ‘bridge the gap’ when developers and builders are waiting for other financial transactions to fall into place. Think of it as a short term loan when there are no other means of finance, and the money is needed quickly! Due to the nature of the loan, bridging loans have become a very popular method for property development finance.
Bridging loans depend on multiple factors
Most lenders will consider various factors about the developer or builder before giving out a loan. The worthiness of the developer or builder as well as good credit history are two important factors that most lenders consider. Also, the years of experience, the reputation of the builder or developer and the number of years in the property development sector play a significant role in the decision-making process. Other factors like the period for repayment, the reason for taking out the loan and the period for selling or refinancing also affect the lender’s decision.
Bridging loans can cover a major percentage of the total value
Usually, lenders will provide a loan to value ratio of 65 per cent for commercial properties and a loan to value ratio of 80 per cent for residential properties. Most will ask for a first charge on the property sold or refinanced. Still, some private lenders could also ask for an equity stake in the upcoming project, only if the borrowing is higher than the maximum loan to value ratio.
Bridging loans can be open or closed
An open bridging loan is one where there is no defined exit plan. There is no timing of when the loan will close and what the source of repayment might be. A closed bridging loan is when there is a defined exit plan with definite timings. In this case, the builder and the financer exchange contracts that specify the loan duration, the time of repayment, and the source of repayment. Because of the certainty of closed bridging loans, most lenders and developers prefer to opt for closed bridging loans.
Bridging loans are not very expensive
It is a common belief among developers and builders that bridging loans are very expensive. While this might have been the case years ago, nowadays, bridging loans have become very popular. So, as more and more lenders are offering bridging loans for development finance, the cost of bridging loans is not very expensive. Keep in mind that the interest on a bridging loan is paid every month, as opposed to an annual basis, but it is relatively affordable since these are short term loans. Usually, the interest for a bridging loan varies between 0.4 per cent to 2 per cent per month, depending on the creditworthiness of the builder or developer.
Bridging loans can be secured quickly
You can get approved for a bridging loan very quickly. Usually, a developer or builder will know within 48 hours if their bridging loan application has been accepted or not. Since builders and developers can apply for a bridging loan online, the process of applying is also much quicker. Once the loan is accepted, the money should reach the account within 2 weeks.