Questions to ask when thinking about Bridging LoansPublished on 6th April 2018
Before applying for business finance, you need to be sure that you’re choosing the right product for both your goals and your current financial situation. Although external funding is an invaluable resource that helps your business progress through each stage of its development, getting the sums you need can be difficult, especially at short notice. This is where a Bridging Loan can prove useful. With a Bridging Loan, you could receive a large lump sum applicable for a wide range of purposes in as little as 48 hours from applying. However, to assess whether a Bridging Loan is the right option for your business, you need to consider every aspect of the product carefully. So before entering an application, you need to be sure you understand:
- How Bridging Loans can be used
- What products are available
- If Security is required
- How soon you can receive funding
- How much Bridging Loans cost
- How long a Bridging Loan can last for
- How Bridging Loans are repaid
How can I use a Bridging Loan for my business?
What makes Bridging Loans so useful to your business is that they can be used for a wide variety of purposes. Their main use is for buying and selling property and land but, in addition, a Bridging Loan can also act as an intermediary between other financial products, carrying your business until the next stage of funding begins.
What types of Bridging Loans are on offer?
What makes Bridging Finance such an invaluable tool is that it’s able to adapt to your current circumstances and your goals. Because you’re able to choose between a Closed Bridge or an Open Bridge, with both operating in different ways, you are able to make an informed decision to provide targeted support for your business. However, you need to understand how they both work.
- Closed Bridge: requires you to fully repay the loan by a specific date. This form of business finance could be of assistance if your goal is to buy and sell property, for example, where a completion date has to be set between you and the current owner or buyer.
- Open Bridge: doesn’t present you with a set date in which to fully repay the product, as long as it’s within a maximum of 12 months. That said, a lender may choose to express a cut-off period informing you of how long they’re prepared to wait. If this period passes, you will be expected to pay back the loan regardless of whether or not you have the necessary funds. As such, this type of Bridging Loan could be useful for providing funds for projects where the completion date can vary.
How are Bridging Loans secured?
Bridging Loans are secured forms of business finance that require you to present collateral, typically in the form of valuable land and property that doesn’t already have debt against it. There are no restrictions on the types of property that you can present, just as long as you own it outright, regardless of whether it’s residential or used commercially. If you wish, you can even present more than one property as collateral.
However, although providing security can help you gain the confidence of potential lenders, you need to be aware that you are putting any property or land that you present at risk. If your business becomes unable to repay the loan or keep up with the repayment process, lenders can seize control over these assets to recover the money that they are owed.
How much money can I borrow?
By applying for a Bridging Loan you could gain up to 80%, or possibly more, of the total cost or expenditure you’re looking to subsidise. Because Bridging Loans use a percentage, unlike Term Loans, there’s no maximum limit dictating how much you’re able to receive. However, Lenders may impose their own limits based on how much they are willing, or can afford, to lend to your business. As such, when choosing lenders, you need to apply to a lender who can facilitate your request.
Are Bridging Loans expensive?
Bridging Loans often carry a high interest rate, which can depend on the lender and the strength of your credit score. When deciding whether to offer your business an agreement, lenders may ask to review your credit profile in order to gain a better understanding of your current financial situation and performance. Although possessing a weak credit score usually isn’t used against you, it can affect the rate of interest that you’re offered. Lenders typically have a range of interest rates available, but the rate that you’re presented with is decided, in part, by the strength of your current credit score. So, the weaker your score the more interest you’ll be expected to pay, and vice versa.
In addition, some lenders may also impose additional fees. These can include arrangement fees, setup charges, administration costs, legal costs and exit fees. So, before entering into any agreement, you need to be certain what charges may apply and how much they cost. This is necessary as this will help you work out the total cost of finance and whether you could get a more favourable deal with another lender.
How long are Bridging Loan terms?
Bridging Loans are typically short-term business finance solutions that last up to 12 months. Because this type of finance often carries high interest, being a short-term solution can usually be more cost-effective for you as a borrower. However, some unregulated lenders could extend the term further to around 18 months, but doing so may result in your business incurring, and repaying, more interest. If you’re looking to reduce the amount of interest, it’s worth noting that you can choose to fully repay a Bridging Loan sooner than expected. But before doing so, check with your lender first as some lenders may impose a fee for doing so.
How are Bridging Loan repaid?
Another aspect of Bridging Loans that makes them a valuable resource for your business is how they’re repaid. When discussing repayment, you normally have 3 repayment schemes available: Pay Monthly, Rolled-Up Interest and Retained Interest. All of these options work in different ways, so you need to understand how they function before deciding on which will work best for you.
- Pay Monthly: requires you to make interest payments at the end of each month until the principal, or the money borrowed, has been fully repaid.
- Rolled-Up Interest: adds up all the interest that you have incurred throughout the agreement. The interest is then combined with the principal, or the money borrowed, and made payable in a final payment. Note that this option will increase the size of the end payment.
- Retained Interest: enables you to borrow the interest which would be incurred for an agreed number of months on top of the funds you are requesting access to. The retained interest is kept by the lender and is used to help you make monthly interest payments. Once the principle has been fully paid and the agreement has ended, some lenders may reimburse the remaining retained interest that wasn’t used to your business.
Need access to a large lump sum, and fast?
Obtaining the funds you need to achieve your vision can be arduous and time-consuming. But when needing finance to help with an urgent business matter, you often don’t have the luxury of time. You need to have the money in your account now. This where Bridging Finance can help. No matter what the project, or what you need the funds for, a Bridging Loan could provide you with the cash you need to support the goals you have for your business in as little as 48 hours of applying. So, if you’re looking for cash support in order to achieve your goals, apply for Bridging Finance today, or find out more with Rangewell.
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