What can bridging loan be used for?

In today’s highly competitive business and real estate environment in the UK, cash is king.


Without sufficient finances, you cannot be in a position to grab opportunities as soon as they arise. That’s just the truth of the matter.  


The biggest challenge to preparing for business opportunities is the fact that they come up when you least expect them. If your finances are not in place at that time, you will watch helplessly as they slip away from your grasp and into the waiting arms of competitors.  


Fortunately, you can use bridging loans to grab some of those once-in-a-lifetime chances.


A bridging loan allows you to stay on top of the game even when you are having short-term liquidity issues. It will help you generate capital for stock purchases, property acquisitions and other short-term financing needs as you wait for long-term financing.  


How does a bridging loan work?


A big difference between a bridging loan and a regular loan is the amount of time it takes for a bridging loan to be approved and processed. While a regular loan can take up to several months to be issued, it is possible to get a bridging loan in just a few days or even within 24 hours.  


It is a secured loan that is fast and flexible. It provides you with the important cash injection you require immediately. In addition to funding residential and commercial property transactions, a bridging loan can also be used as a source of short-term financing in a business.


Here are seven reasons for taking a bridging loan:

1.Meeting a transaction deadline Sometimes, banks and lenders take a while to approve loan applications. In a situation where you are trying to meet a strict transactional deadline, you just can’t afford to wait for the loan to be approved. A bridging loan can be a great solution because of the fact that it is approved within a very short time, usually within a few days.


2.Solving short-term cash flow issues From time to time, a business can run into cash flow problems for various reasons. For example, customers may fail to pay their invoices in time or a bank may decide to recall it its overdraft facility. Another reason would be an immediate need for new equipment.  


3.Preventing repossession of property If your property is about to be repossessed, you can use a bridging loan to pay off your creditors and thereby prevent the repossession. This will enable you to continue owning the property and also give you ample time to sell it on your own terms.  


4.Renovation and restoration of property It is not uncommon for lenders to consider a property unfit for mortgage purposes. The most common reason for this is the poor condition of the property. In such a case, a bridging loan may be secured against that property. The funds will then be used to restore it with the aim of selling it or using it as security for a mortgage.  


5.Buying property whose value is below the market price In most cases, bridging loans are given against the market price rather than purchase price. If you find a property that is being sold at a price that is well below its current market value, you can use a bridging loan to acquire the property and then sell it at a profit.


6.Property expansion If you are a landlord, you cannot just rely on rental income to expand your property portfolio because it will take too long. You can use a bridging loan to finance the expansion and then repay it with the extra income.  


7.Property auctions Property auctions usually present some of the best opportunities to acquire property at cut-prices.


However, if you don’t have the necessary finances in place, you can miss out on a great opportunity. With a bridging loan, you can cover the entire cost as you wait for the bank to approve your mortgage.  


Why are more people using bridging loans? In recent years, more businesses and individuals have realised that a bridging loan can be a great source of short-term financing due to the flexibility it provides. Although the interest rate on this loan is higher than that of other loans, it is still a great option for any business or individual to have.  


With a bridging loan, you can be able to take full advantage of business opportunities, secure great property deals or resolve an emergency situation that you would otherwise not have been able to.


The amount you should borrow will depend on your own circumstances.  


What is the repayment period of a bridging loan? A lender will typically expect you to pay back a bridging loan within a period of 12 months or less. It is meant to bridge a small gap between finances. That means you will pay it back within the stipulated period with the expectation that you will have secured long-term funding or sold an asset.


You can also choose to pay off the entire loan before the expiry of the 12-month period if you get your financing sooner than you expected.


When considering the cost of the loan, it is important to look at all the fees and not just the interest rate.  What if I default payments? In order to secure a bridging loan, you must fully explain to the lender how you are going to repay it. In most cases, the lender will require you to show proof of expected financing.


However, despite all these measures, things don’t always go according to plan.  


In most cases, lenders work with the borrowers to find a solution.


Since it is a secured loan, the onus is on the borrower to ensure that everything is done to secure funding in good time.


To avoid overrunning the timeframe, it is advisable to opt for the longest term available. In any case, you can always pay off the loan earlier if you secure funding earlier.  


There is no doubt that a bridging loan can be your ultimate saviour in a sticky cash flow situation. It will help you alleviate some of the pressure that comes with lack of short-term financing. As long as you have a clear-cut exit plan, a bridging loan remains a great source of short-term financing.

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