Bridging loans are not just the go-to loan for property developers or for people buying property at auction.
In fact, anyone can apply for a bridging loan for any legal purpose, which is one reason this form of finance has grown in popularity, resulting in the financial industry experiencing an increase in money loaning through bridging loans from £750m to £4b between 2011 and 2016. Although bridging loans are one of the least understood forms of finance, they are actually one of the most flexible finance options available.
Bridging loans have been compared to short term mortgages, but this can be slightly misleading, as they don’t have to be used solely for the purpose of buying property. One similarity between a bridging loan and a mortgage is that both have to be secured against property (although it is possible to use other high value assets as security for bridging loans) and the amount the lender agrees to loan is usually dependent on the value of the property. They also both have a term agreed in advance, with interest payable on the loan.
However, that’s where the similarities end. A bridging loan differs in duration – both in the time it takes to secure (which is very quick compared to a traditional mortgage) and in the overall term of the loan. A bridging loan is normally taken out for 6-12 months, compared to, in most cases, 25 years for a traditional mortgage.
Other factors that make a bridging loan an attractive option for more creative uses include the repayment criteria; the lender takes into account the ability to pay the loan off, rather than basing this solely on personal income. Also, mortgage lenders only lend on properties that are of a certain habitable standard, whereas this is not applicable for bridging loans.
So, let’s look at some of the more creative ways you could use your bridging loan for – and start thinking out of the box.
Purchase Unusual Buildings
Not everybody wants to buy a show home. Developers or individuals looking for properties they can put their own personality and design ideas on, without building from scratch, often consider dilapidated or run down properties that most buyers would never consider as a viable project. Yet there is something very satisfying about buying a property that has more holes than roof and turning it into a building to be proud of. Not only that, but these derelict properties are often sold very cheaply. After the renovation the return on investment can be high, making them a developers dream.
One problem often experienced is that high street mortgage lenders see these types of property as uninhabitable and will not offer a mortgage on them due to the apparent lack of security they offer. If you find yourself in this situation don’t despair, as finance is available in the form of a bridging loan.
Although bridging loans are short term financing (this is normally up to 12 months) this duration should be long enough to make the property habitable – which means ensuring the property has running water, a functional basic kitchen area and a bathroom. It should also be watertight, so the roof needs to be serviceable. Anything aesthetic is not important at this stage; the aim is to be able to classify it as habitable so that you can then apply for a traditional longer-term mortgage.
Alternatively, use the time to completely renovate it and sell it on (if that is your business plan), and pay off the loan from the proceeds of the sale. If you feel it is viable to complete the refurbishment within the time frame then a bridging loan is an ideal option.
There are also other unconventional types of property that you may have difficulty securing a mortgage for, such as an old chapel or church, lighthouse or windmill, or any other quirky building that does not fit under the umbrella of habitable residence. The mortgage lender’s main concern is how sellable a property is if they have to repossess it. So, although mortgages can be found for these types of property, it is much more challenging if they are not yet converted into liveable space. In these cases, a bridging loan can help secure these character properties when other lending streams are unavailable.
Traditional lenders can also be wary of high rise flats outside of London, particularly those higher up the building. It can also be difficult to obtain funding on areas considered a flood risk Materials and design of the property can also affect mortgage approval. If the property you have your eye on deviates from the norm and you are struggling to secure finance, a bridging loan may be your answer.
Correct Short-Term Cash Flow Problems
Cash flow issues are a common challenge faced by most business owners. Whether you have a VAT or Tax payment, or overdue unpaid invoices, or too much customer credit, or perhaps you have had to invest more into new technology than you anticipated; whatever the reason, having a safety net to help during this situation can help a company overcome such problems.
A business bridging loan can provide this cushion. It is usually secured against company owned assets such as property or land, although some businesses have used stocks and shares as security. The application process is quick, which is ideal when cash is needed in a hurry. There are also no early repayment fees so if capital is freed earlier than expected, the loan can be paid off with no further financial costs incurred; in fact an early repayment of the loan will save on interest.
Life is full of unexpected surprises; bills you have not accounted for can be included in this, even if they are not the most pleasant of surprises. A bridging loan allows you to leverage your existing financial and property resources to pay large and unexpected expenses.
Fund Your Startup
Startups require an injection of cash to begin trading. Whether funding is needed to invest in technology, business set up costs, wages or overheads, it’s a time in the business when the company is either not yet generating any income, or the revenue is low.
Due to of the speed of the approval process provided by a bridging loan, it’s an ideal method of quickly financing all the different aspects of starting up a business. As long as you have assets such as an office building or property to secure the loan against and a business plan in place that provides evidence that you can repay the loan, this method of finance can be ideal for startups.
Other forms of funding, such as crowdfunding or business loans, can take a while to be finalised which will also require a certain amount of transparency regarding your business idea. If you are not ready to expose your idea publicly, a bridging loan offers a way to secure finance privately.
If the business is undergoing a growth period and needs to expand certain areas, such as office space or taking on extra staff, but has not yet seen the necessary return, a bridging loan can allow the business to expand. Otherwise, it could mean stalemate for the business if it is not able to fund this period.
So long as the business starts to generate income within the time frame of the loan, the funds can be utilised to make repayment.
Leverage Quick Cash Purchases
Cash is a valuable commodity and can provide access to investment opportunities such as stocks and shares. Often in these situations, time is of the essence and as cash is a quick form of currency it is ideal for this type of business deal. Cash also gives you the opportunity to strike a more beneficial and cost-effective deal.
Accessing large volumes of cash is not easy. Withdrawing money from long-term savings accounts can take weeks, if not months, to arrange, by which point the investment opportunity may have passed. Applying for a traditional loan also takes time, but the speed of approval of a bridging loan makes this form of funding a good fit for when cash is needed quickly.
This also applies when buying property as a cash buyer; you will find there are some great deals to be found if you have cash available to purchase quickly. Some sellers will be happy to sell at a discount if they know they are getting the cash speedily. Waiting for a mortgage to be approved can be a lengthy process, but a bridging loan allows you to complete the negotiations quickly.
Another situation where a quick cash purchase might be invaluable is if you are looking for new business premises and have a deadline to secure your property. With a bridging loan, you can make your offer and as soon as it is accepted the buying process can begin, rather than waiting for mortgage approval. The loan can then be paid off by obtaining longer-term finance at a lower rate after the initial bridging loan has been approved and the purchase made.
You may come to a point in your life when your home is no longer suitable for your needs and you decide to downsize. Downsizing a property should be as simple as selling the bigger property and then purchasing a smaller property with the proceeds. The reality is that smaller properties are highly sought after and purchased quickly when they become available. If you want to downsize fast because you have found a suitable property that you don’t want to miss out on, you probably won’t want to wait for your original home to sell. In this scenario, you will need an alternative form of finance to purchase the smaller property.
By using a bridging loan for your downsized property not only will you get access to the cash quickly (and therefore not miss out on your new dream home), but you will also give yourself breathing space to sell your old property. This gives you the advantage of sorting and organising your belongings as well, as it is unlikely everything will fit into the smaller property. Rather than rush the process due to new owners waiting to move in, you can spend time packing and planning.
When the old home sells, you can then use this money to pay off the bridging loan. If it sells quicker than anticipated, you can pay off the loan without incurring any early repayment fees and saving on interest that would have been due had the loan run until the end of the term.
This makes it an ideal solution for retiring couples who want to start enjoying their golden years immediately, rather than waiting on a property sale. It’s also an option if you are downsizing commercial property such as moving to a smaller office space.
A final word
Although bridging loans are commonly associated with buying property at auction, as well as a tool used frequently by property developers, bridging loans are a much more flexible form of finance and can be used for a variety of reasons. They can be used for residential or commercial purposes and can be applied to a range of projects that do not qualify for more standard forms of finance. If unsure, Novellus can provide guidance and help you obtain the right bridging loan for your individual needs.
If you need cash quickly and have the means to secure the loan through assets, as well as a plan to pay it off after the term of the loan, then consider a bridging loan for a variety of projects and uses. Bridging loans can allow you to think out of the box and take on projects that you otherwise might not have considered. They are also an ideal solution for helping a business to expand, providing much-needed cash injections just when required.
If you thought bridging loans were just for property development, think again!