£250,000 bridging loan - to save a home
Sadly, business plans do not always go as expected. Lenders are understandably unable to advance more funds when a business fails, and this can often mean that the business itself is lost.
However, the financial damage of business failure can be even more serious when the owner has used his or her home as security for a loan to try to keep the business afloat.
This was the situation a couple living in an attractive part of Essex found themselves in. The owners clothing business had been hit by problems with the increased cost of importing goods manufactured overseas. The business became insolvent and ceased trading - but a secured loan of £200,000 remained outstanding on the owner's house.
It looked as though the owner's family would lose their home.
He called us at Rangewell for help.
We saw that the problems were very serious - but we were determined to do what we could.
Clearly, most forms of business finance were no longer possible - the owner did not have a business that could be lent to. His one remaining asset was the home, which was worth in the region of £2,000,000. There was a £750,000 mortgage outstanding on the property, and with an income of just £20,000 from the owner's wife’s employment, it was impossible to maintain mortgage repayments.
Selling the house would provide a financial lifeline, but with a lender’s lien on the property, the possibility of arranging a sale in a suitable timescale looked impossible.
If the house could be sold at all, it might need to be done at a loss.
How Rangewell helped
We saw the answer in a Bridging Loan.
A Bridging Loan is so-called because it is designed to bridge a short-term funding gap. Bridging Loans are short-term loans secured on property. They can offer a way to raise a large sum of money to fund a property purchase quickly, or when a conventional mortgage product cannot be arranged.
However, they have another important use. They can be arranged to raise money on a property that is already owned.
Bridging Loans raised in this way can often be used to fund business and property purchases, but there is no restriction on how the funds can be used. So if you are faced with a sudden unexpected cost, or if you need to raise large-scale finance to take advantage of an opportunity - a Bridging Loan secured on a business or residential property you already own could provide the answer.
We believed that our client would be able to use a bridging loan - actually a second charge loan, since the property had a mortgage secured upon it - to raise sufficient cash to pay off the business loan commitment. We approached a private lender who could provide this type of funding at short notice.
We requested a bridging loan of £250,000. This would be sufficient to pay off the business loan and help provide funds to cover mortgage payments - and allow the house to be sold not as a distress sale at an auction, but through the usual retail sales channels, which offered the best prospect of realising its full value.
The lender looked at the documents we provided and was prepared to advance the funds required at a rate of 15%
Why this approach was essential
Most types of business finance require monthly loan repayments. These may be of both interest and a proportion of the capital, or of interest only. However, in this case, our client had no available funds.
Instead, the lender was prepared to agree for all interest to be added to the principle, which would be repaid at the end of the loan period, once the house was sold. This would mean that there were no interim payments to be made.
The funding Rangewell organised:
Bridging loan of £250,000 for 12 months
At 15% to be rolled up
Total repayable on sale of house £237,500
Our client was able to use the funds raised to pay off the business lender, allowing his family to stay in their home while a sale was arranged.