Callum McInnes: Bridging finance – positive alternative funding or dangerous gamble?
Over the past five years or so, mainstream lenders have cut back and in many cases withdrawn lending altogether. This has made way for an alternative form of funding in the form of bridging finance, writes Callum McInnes.
It is no secret that mainstream lenders over the past five years or so have cut back and in many cases withdrawn lending altogether for investors and developers alike where the risk factor is deemed to be too high.
Whilst not surprising given the political uncertainty of late and the perceived fragility in the property market, this has made way for an alternative form of funding in the form of bridging finance.
Typically, these loans are between six months and 24 months in duration and are designed to facilitate development or to be used as a stepping stone until longer term or more affordable finance becomes available.
The lenders are able to offer a quick decision on finance with upfront and monthly costs clearly identified from the outset and the main players in the market place have sophisticated websites that allow you to obtain a lending proposal in a matter of minutes.
In a general sense, this has been a positive development in the market. The emergence of this alternative form of funding has allowed projects to emerge that would otherwise not have broken soil and it has allowed businesses to continue to grow. It also provides a lifeline for those who, for whatever reason, would not be eligible for mainstream commercial lending.
There are, however, some fairly fundamental considerations for those considering this line of funding:
- It is short term borrowing – Do you definitely have a plan and the means to repay the loan at the end of the term?
- The interest rates and fees are nearly always higher than mainstream unsecured, mortgage or second charge lenders – Have you exhausted these options?
- The default interest rates if you can’t repay the loan when it’s due can be excessively high, and often contain punitive late repayment interest charges.
- Quite often bridging loans will be backed by a personal guarantee, providing them with a security over your personal assets, including your home.
Whether or not bridging finance is a viable option for the prospective purchaser or developer depends on a variety of factors, however, the main consideration will, of course, be being confident of having the means to repay within the term of the loan.
For those with a moderate appetite for risk, a clear plan with a timescale for making repayments timeously and, sufficient margin for error should things not go to plan, then bridging finance provides a clear, viable short term funding solution.
Callum McInnes is a senior solicitor at BTO LLP