A guide to bridging loans

Many people overlook the option of a bridging loan because they associate it with the stop-gap finance needed to keep a collapsed property sales chain together. However, bridging loans are a great option for many other requirements. This article provides a guide to bridging loans, taking a look at the criteria and what they can be used for.

Let’s start with the basics, in that applicants must be at least 18 years old to acquire bridging finance. In most cases, bridging loans are secured against property (commercial or residential) in the form of a first, second or third charge (first charge if the property is unencumbered/debt-free). However, it may be an option to raise funds on other assets, although this depends on the liquidity and stability in the asset value.

There are many bridging finance providers that offer loans to those with an impaired or adverse credit history. Adverse credit history may involve arrears, county court judgements (CCJs), individual voluntary arrangements (IVAs) and even bankruptcy.

The uses for bridging loans, which can be arranged over a 3 to 36-month term, are more extensive than you may imagine. This is because the very nature of a bridging loan is that it is a short-term finance option, extending to far more than keeping a property chain together.

Common uses for bridging loans include:

  • You need to have the money on hand and there often isn’t time to put a traditional mortgage in place. The property may also not be in a mortgageable condition.
  • Similar to the above, buying a property where a regular mortgage provider will not lend. This may be due to structural issues or whether the property is in a habitable condition.
  • Financing a renovation, extension or other major works.
  • Clearance of debts and, as mentioned earlier, clearing bankruptcies.
  • The acquisition of a business can be achieved using a bridging loan as short-term finance. Bridging loans are not only for personal use!
  • Improving business cash flow with an injection of liquidity.
  • As the name suggests, bridging a gap in finance whilst waiting for other funds to become available.
  • Keeping a sales chain together. If you’ve found the home of your dreams but suddenly lose your buyer, the traditional option is to use a bridging loan to keep the chain moving forward and complete on your new property. When your original property sells, bridging loan and associated fees are then cleared.

Another misconception around bridging finance is around income. It is common to ‘roll up’ payments and interest and clear the whole debt at the end of the term. Therefore, monthly payments are not a requirement, and a stated income is often not relevant.

If you’re unsure if a bridging loan, development finance or other short-term finance is right for you, feel free to get in touch to discuss your requirements.