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Small Business Tips

Bridging Loans: Are They A Good Idea?

Most people require a loan at some point in their life. There are many specific types of loans that you can choose from. However, you should be clear about the main differences between bridging loans and bridging finance, in the event you are offered either of these products. Bridging finance is usually available to larger organisations, building contractors for instance or property developers who will get regular injections of finances from clients who have purchased properties from the developer.

Thus, bridging finance can aid a developer to complete their project with easily available funds, secured against the development, while being reimbursed by clients. These loans are far less risky for the lender because the property developer or borrower will acquire a secured cash flow from customers. The lender knows that there is property acting as security against the loan which can be realised in case the borrower has difficulty repaying the loan for any reason.

In addition to property developers, homeowners who have decided to sell a home and invest in a new one may do so with bridging finance also. The bank will advance the cash for a lower rate of interest than market rate to get a brand new house while they wait for the payment from selling the family home. However the time period during which the bridging loan needs to be repaid depends on the lenders terms. A closed bridging loan, for instance, will need to be repaid in a pre-determined time frame (hence the term closed bridge), whereas an open bridging loan may have a more flexible repayment term. Bridging loans are short term loans which are generally given to smaller clients or companies for periods ranging from a few weeks to few years. Interest rates on this type of bridging loan will be above bank rates to reflect the risk to the lender and the cost of realising the value of any assets used as security if the loan is defaulted on.

There may also be a lower loan to value (LTV) on such loans in order to minimise the lenders risk. However, if you repay the bridging loan within the specified time period, you are able to close these loans in advance of the agreed term, often incurring mo exit fees. Bridging loans have become much more popular in recent times due to the reluctance of mainstream lenders to lend to ‘risky clients’ post credit crunch.

They are often used to solve cash flow issues, caused by a large tax bill for example, and they can be returned and closed when the issue has been resolved.

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