Bridging finance is a tried and tested solution for a variety of financial needs, ranging from covering the shortfall of crucial stock purchases or the cost of expensive machinery for a business. Most notably, bridging finance can help property developers secure their next investment opportunity, affording a level of flexibility difficult to find elsewhere. However, while decidedly useful, bridging loans are not an option for every scenario. Some situations simply aren’t appropriate for bridging finance, while in others, the borrower might be ineligible for one reason or another. But what makes a borrower ineligible, and can you get a bridging loan with bad credit?

In this article, we will discuss bridging loans, how you can get one, and how important credit is in deciding a loan application. Let’s get started.

What is a bridging loan?

Bridging loans are a form of finance that falls under the secured loan umbrella. This means that, unlike unsecured loans, bridging loans require the borrower to put forward one or more assets for use as collateral. Assuming these assets are of sufficient value, the lender will place a lien on said assets. This effectively secures the loan against the assets, while allowing the lender to enforce asset seizures should the borrower default. While this exposes the borrower to higher risk than with alternative solutions, it is also the source of many advantages boasted by bridging finance.

How do bridging loans work?

At their core, bridging loans are fairly straightforward, functioning in a similar way to other secured loans. First, borrowers must apply for a bridging loan using either a private lending service or a financial institution, such as a bank. Note that some banks do not provide bridging loans as a service, and few openly advertise it along with their other products. Once a suitable lender has been found, the borrower must complete a simple application process, detailing credit score, proof of income, and, most importantly, the value of collateral assets. Depending on exactly what is being purchased, and the loan-to-value ratio, some lenders may request borrowers provide a reason for purchase and a business plan. Assuming the application is successful, borrowers will receive their funds in short order, typically within as little as a few days.

Upon receiving the funds, borrowers can purchase their desired asset. For this example, we will assume the asset in question is property. In such an instance, borrowers can make a cash offer on their new home or development opportunity. Sellers view cash offers favourably, improving the odds of a successful and swift deal. With the property purchased, the next step is to repay the bridging loan.

Bridging loan repayment

Bridging loans can be repaid in a number of ways. In the context of property purchases, bridging loan repayments are most often made in one of two. First, borrowers may sell off an asset, usually the asset already used as collateral, to cover loan repayment. This is most commonly done when a quick sale can be ensured, or there was an offer on the collateral asset before the new property was even purchased. However, this option can be a risk if a sale cannot be assured. Alternatively, borrowers can refinance their bridging loan to cover the debt. Mortgages are typically used to refinance bridging loans used to purchase property, though any loan capable of raising the necessary finance can suffice. Regardless of the repayment method you choose, you must make a swift repayment to avoid rising costs and asset seizure.

Am I eligible for a bridging loan?

Unlike certain alternatives, bridging loans do not have particularly stringent eligibility criteria. Whereas other loans require borrowers to have a particular credit score, monthly income, and so on, bridging loans place near-absolute importance on asset value. In other words, qualities that are necessities for other loan types merely back up a bridging loan application, while asset value is the make-or-break. If you have assets or equity of sufficient value compared to the requested loan, then you will likely have a successful application.

As we mentioned, some bridging loan lenders will require more information about a purchase from borrowers. This is highly dependent on the wishes of specific lenders, and is usually only required in niche cases, or when large sums of money are involved. For example, should a borrower wish to purchase a plot of land or a derelict property, some lenders will wish to see a detailed plan of how the venture will turn a profit. For example, showing planning permission and a plan of how value will be added to the property in question is likely to be sufficient.

Can I get a bridging loan with bad credit?

Although bridging loan lenders place the most emphasis on the value of assets to be used as collateral, credit history is still a factor. Most lenders will at least require evidence of your credit score, even if it isn’t terribly influential over the outcome of an application. That said, some lenders will place a degree of importance on credit score, keeping certain products exclusive to borrowers with a stronger credit score. Many lenders will also offer bridging loans at better rates to borrowers with better credit, reducing the overall cost of the loan. As such, while bad credit won’t preclude prospective borrowers from obtaining a bridging loan, it may mean fewer options from certain lenders and a higher cost overall.

Wrapping up

Bridging loans are an excellent tool for a great many purposes, ranging from purchasing critical equipment for a company’s operations to a new property. Bridging loans are flexible, capable of raising large sums of money quickly, and are relatively straightforward to obtain. Better yet, it is entirely possible to obtain one even with bad credit. However, all forms of finance come with their downsides, and bridging loans are no different. One of the most notable downsides is the risk borrowers must assume, due to the requirement of collateral as part of the loan agreement. Borrowers who may default risk losing their assets in lieu of a cash repayment, potentially worsening an already poor financial situation. As such, it is vital to seek professional financial advice before taking action.