The role of bridging has become an increasingly popular way for companies to raise finance in the UK. Since 2011, the amount of money being lent out through bridging has increased from £750 million per year to over £4 billion in 2016 (Source: BridgingLoanHub). This huge increase is fuelled by UK banks with a tighter lending criteria and the growth of the bridging industry, both through better education of the products available and competition from brokers and loan providers.
What is bridging finance?
This is a type of short term finance which is used to ‘bridge the gap’ between the purchase of something that has a strict deadline. In other words, it is a way of raising finance to capitalise on a deal that is time sensitive and failing to raise sufficient funds will cause you to lose out on the deal. Loans are available for up to £25 million, but because they are classified as short term, they typically last between three and 24 months.
How can you use bridging to purchase property?
Purchasing properties is the most common reason for a bridging loan and can be used by property developers, companies and even individuals. The idea is that if you have a property that you are desperate to complete on but do not have the full funds available, you can avoid the traditional process of applying for a mortgage and use a bridging loan to secure the funds. Putting down the property as collateral, this type of finance can be funded in two to three weeks. This product is ideal for those looking to complete very quickly or perhaps because they have bought property at an auction and need to come up with the money within 28 days.
Example: Jim has purchased a property at an auction for £1 million and has paid his 10 per cent deposit there and then. He now has 28 days to come up with the remaining £900,000 or he risks losing the property and paying administration and cancellation fees. Fortunately, Jim has some savings and has raised money elsewhere totalling £400,000, but what about the remaining £500,000? Jim can apply for a mortgage but this will take several weeks to get an answer and go through. But with bridging finance, he can borrow the £500,000 at a 50 per cent loan-to-value and receive the funds before the deadline.
How can business owners raise money?
Although ideal for buying property, bridging can be used for business owners. For instance, if you are looking to buy new offices because your company is growing quickly, you can put down your office space as collateral to secure the loan.
Another example includes an investment opportunity which requires funds before a given deadline eg start-ups, stocks, share etc. Provided that you present a business plan and opportunity to the lender, they can also consider you for bridging finance.
Is the industry FCA regulated?
Yes, the bridging industry is FCA regulated meaning that brokers and lenders require authorisation to be fit to trade in the industry. The laws revolving Treating Customers Fairly mean that if you apply through a broker, they are obligated to introduce you to the cheapest loan product available, regardless of who they have partnered with.
If you have a poor credit history, there are also companies classed as ‘non-status lenders’ such as MT Finance, who do not consider credit history during their approval process. Instead, the lender will look at the potential value of the property or business more carefully when making their decision.