A bridging loan, or bridging finance, can be useful for you when you are in need of short funding because it allows you quick access to funds. It is an interest-only loan and also known as gap financing, that you can use for a number of purposes. Due to flexibility in use and eligibility criteria, more and more numbers are turning to bridging finance instead of taking out long-term financing.
You can take out such a loan from bridging loan companies or p2p lending platforms. The most common use of bridge loans is to purchase a residential or commercial property for the renovation of a property to increase its value. Bridging lenders do not interfere with using funds as long as you make payments on time. If you need to gain knowledge about this type of funding and secure it for the first time, you can take help from an expert broker to find the best lender and competitive interest rate.
Here in this article, we will describe some reasons that help you understand why you should use a bridging loan.
Reasons To Use A Bridging Loan?
Bridging loans are popular for their speed of arrangement and flexible eligibility criteria. You can use it for almost any legal purpose. Here are some most common uses of bridging finance:
Purchasing A New Property
This is the most significant use of bridge loans. Most property developers and investors get quick funding from bridging lenders to purchase a new property. If you are in a situation where you want to purchase a new property but are waiting for the sale of another property to get funds, that sale still needs to be completed. A bridging loan can be a perfect solution in this scenario as it bridges the financial gap, providing you with the funds you need to complete the purchase of a property.
Once the sale of the other property is complete, you can use this amount to repay the bridging finance amount. You can also repay the loan amount by getting funds through a long-term funding option such as a mortgage.
Purchasing A Property At Auction
Auctions are limited-time opportunities, and property investors want to take advantage of such opportunities. If you want to purchase a property at an auction and you win a bid, you are expected to pay a 10% deposit on the same day, and the rest of the money should be paid within 28 days.
If you choose to take funds through standard bank loans or mortgage lenders, you may lose this opportunity because such loans take weeks or even months to release funds. However, in most cases, bridging lenders usually take a few hours to assess your loan application and transfer funds into your bank account within 48 to 72 hours.
Bridging finance reduces the stress of needing help to complete the purchase within a tight auction time frame. You can get quick funding and repay this amount once the mortgage is ready.
Funds For Renovation Or Refurbishment
Refurbishment and renovation of a property before sale or renting it out can increase its value. It is almost impossible to secure funds for refurbishment from a traditional lender as they find that the property in its current condition needs to be fixed. Most mortgage lenders accept standard and habitable properties. Generally, light refurbishment work needs a small amount, so you can take help from bridging loans.
Bridging finance for renovation or refurbishment is useful for property developers and buy-to-let property investors who want to improve the condition of a property by adding a new bathroom or kitchen before selling or renting it out. These loans are arranged within a short time and are repaid once the project has been completed or a mortgage has been secured.
Short-Term Working Capital
As we mentioned that bridging loans have multiple uses, businesses can also take out bridging finance to use it as short-term working capital. There are situations when businesses face a temporary decrease in the cash flow due to seasonal fluctuation or any other reason; bridge loans can provide quick cash flow injection so that you can keep your business running. You can use funds to pay wages, purchase new stock or equipment, pay tax bills or solve other business cash flow problems.
Purchasing a Commercial Property
Suppose you want to become a successful property investor in this highly competitive real estate market. In that case, it is no secret to respond to a new opportunity as soon as it presents itself. Property investors looking to purchase commercial properties need quick funding. In most cases, it is difficult as capital may be tied up in another asset or property.
When it comes to long-term loans, you may find that commercial mortgages have a higher complexity level than residential mortgages, and they require larger deposits. In addition, mortgage lenders apply rigorous income stress tests, which makes it difficult to access funds through this route. It is also a time taking and arduous process. In addition, if the princess takes a long time, investors risk losing their deposit if the sale falls through.
On the other hand, bridging finance is one of the most viable options to purchase commercial properties as it provides you funding in as little as five days. However, this time may vary depending on borrowers’ circumstances. Bridging loans help property investors to remain competitive and take advantage of future opportunities.
Although bridging loans offer several benefits and allow you to use loan amounts for any purpose, you must consider the interest rate before making a decision. Due to their short-term nature, bridging loans come with a high-interest rate that you may need help to repay. However, if you are able to repay the loan, you can use it for multiple reasons, from purchasing a property at auction to fulfilling your business cash flow needs. Bridging lenders do not interfere with the use of loan amounts when you are making timely repayments, but if you fail to repay, the lenders have the right to repossess your property.