Bridging loans are a tried and tested form of finance, one proven to be especially effective in certain industries and for specific purposes. For example, bridging loans have seen marked success in the property development industry, and have helped many prospective home-buyers obtain their dream home. This is due to the unique advantages afforded by bridging loans, advantages that make this form of finance highly effective when purchasing property. As such, bridging loans could be an excellent way to fund your next development project, or the purchase of your new home.
But how exactly can these loans be obtained? What are the bridging loan criteria, and how can a prospective borrower apply for one? In this article, we will answer these questions, break down the application process, and discuss who can make an application. Let’s get started.
What is a bridging loan?
Bridging loans are a form of secured finance, one that aims to “bridge” the gap between the purchase of an asset, and a long-term financial solution. This is accomplished by offering borrowers large capital sums quickly, using the borrower’s physical assets as security. In doing so, borrowers can access finance much faster than using other methods, and have loan amounts limited by the value of their assets. This can allow for substantial loans, although it does expose borrowers to a higher level of risk than with unsecured loans, as collateral assets can be seized in the event of default.
Bridging loans are an inherently short-term form of finance. While most other loans have a term measured in years, bridging loans tend to be measured in months. It is uncommon to see a bridging loan last a full year, with many being repaid or refinanced mere months after taking effect. While these qualities may seem like drawbacks at first, this structure allows bridging loans to offer borrowers the key benefits that have regularly led to success.
Who can apply for a bridging loan?
The precise criteria for a bridging loan will vary from lender to lender. Some will be more rigid than others, while others still will be more concerned with certain criteria as opposed to a longer list. That said, some common factors are shared between the majority of bridging loan lenders. Here are a few that you should keep in mind:
Bridging Loan Criteria
- Limited companies, business partnerships, and even private individuals can apply for bridging loans. There is usually little difference in the process, regardless of which category you fall into.
- Most lenders will have a minimum borrowing threshold, which typically sits at around £10,000.
- The borrower must have one or more physical assets that can be used as collateral. These assets must have a value proportionate to the loan’s value.
- Borrowers must be within a certain age range. While all lenders require a minimum age of 18, some also have an upper limit.
- The borrower must have an “exit strategy”. This refers to a means of repaying the bridging loan, such as refinancing or the sale of an asset.
- Some lenders will have restrictions on the use of the loan. Although bridging loans as a whole have a wide array of applications, some lenders have a specific use in mind, such as loans for the purchase of property.
This is not an exhaustive list, but should instead be taken as an idea of what bridging loan lenders will expect from a prospective borrower. While bridging loan lenders will typically have some variation of these requirements in mind, they will not expect certain financial information from you. For example, proof of income is not usually of note, along with the borrower’s credit history. This is because bridging loans require collateral, allowing lenders to repossess assets in the event of default. This makes bridging loans generally easier to apply for, although some exceptions exist.
The bridging loan application process
Broadly speaking, applying for a bridging loan is quite easy, especially if you are adequately prepared beforehand. To begin with, prospective borrowers can find a suitable bridging loan in one of two places. These are traditional lenders, such as banks or credit unions, and bridging loan hubs. The latter are typically more suitable, as many banks and credit unions do not offer bridging loans. It is still worth checking with your bank, however, as some do not readily advertise the product.
Once you have a bridging loan in mind, you can begin the application process in earnest. This will involve providing certain details, many of which we have listed previously, and providing a professional valuation of the assets to be used as collateral. Assuming the valuation is correct, and the assets are of sufficient value, then the application will be considered. Upon approval, the lender will place a lien on the assets used as collateral, entitling them to seize these assets should the borrower default. Once the application is complete, funds will be deposited into the account specified by the borrower. This can take as little as 48 hours, though it will depend on your specific lender.
What can bridging loans be used for?
Bridging loans can be used for a wide array of purposes, though the primary use is to fund the purchase of property. Property developers in particular rely heavily on bridging loans, as it allows for the swift raising of funds and the equally quick purchase of a development property. This allows property developers to respond quickly to opportunities in the market, at auction, and even through private sales.
Bridging loans are also an excellent tool for quickly raising cash to purchase a new home. Home buyers can use bridging loans to remove the possibility of a chain break scuppering a deal, as they can make a cash offer without waiting for their house to sell. This offer will be quite appealing to any seller, and may mean the difference between a quick deal, and a prolonged negotiation.
Wrapping up
Although certain restrictions exist, bridging loans are a very accessible form of finance. Due to the requirement of collateral, they are typically easier to obtain than many other loan types, as the traditional factors aren’t as important. While this is certainly convenient, this increases the risk the borrower assumes, as collateral assets can be taken in lieu of repayment. As such, it is important to carefully consider your situation and obtain professional advice before taking action.