A bridging loan has the potential to be a uniquely flexible and cost-effective facility. Designed exclusively to ‘bridge’ short-term financial gaps, bridging loan interest rates can be as low as 0.5% per month.
Qualifying for bridging finance can also be surprisingly straightforward. Eligibility is determined on the basis of two key factors:
- The applicant’s ability to provide assets of value (security) to cover the costs of the loan
- Evidence of a workable exit strategy to ensure the loan is repaid promptly
When you are applying for a bridging loan, you need to convince the lender that you are in a suitable position to repay the loan in full and on time. But what is considered a viable exit strategy, and what kind of evidence do bridging lenders expect to see?
What Is an Exit Strategy?
An exit strategy is a provable plan for repaying the full balance of a bridging loan, on or before the date agreed with the lender. Most bridging loans are repaid with a single lump-sum payment on an agreed date, inclusive of all interest and associated borrowing costs.
To qualify for bridging finance, your lender needs to be confident that irrespective of the outcome, they will get their money back. The applicant, therefore, needs to present a convincing case, along with evidence that all possible eventualities have been considered.
The more credible and realistic your exit strategy, the more likely you are to qualify for a bridging loan at a competitive rate of interest.
Why Is an Exit Strategy Important?
Exit strategies are important as they are used by lenders to measure the risk level of any given investment. Bridging loans are unique, in that they are designed to be repaid within a short period of time. As such, your lender needs to see that adequate provisions have been made to ensure they will get their money back.
A clear and achievable exit strategy holds the key to qualifying for a competitive bridging loan. Some lenders will only issue bridging loans when the borrower agrees to repay the balance in full by a specific date (closed bridging loans). Elsewhere, others will issue loans with no specific repayment date agreed (open bridging loans).
In both instances, the lender needs to be confident they will get every penny of their money back – plus all applicable borrowing costs.
Typical Exit Strategies
All bridging loans are unique, with contracts tailored to meet the requirements of each individual borrower. The same applies to exit strategies, which are also unique to the contract in question.
However, the vast majority of exit strategies fall within one of the two following categories:
- Sale of Property or Development
The most straightforward exit strategy for a bridging loan involves the sale of the property or the development the finance was used for. For example, a bridging loan can be taken out to cover the costs of refurbishing a property, after which the investor sells it for a significantly higher price. The proceeds are used to repay the bridging loan following the sale of the property, and the profits are retained.
In order to determine the viability of this type of exit strategy, the lender will scrutinise all aspects of the planned sale. The average time it takes to sell properties in the area, average property prices at the time and so on – are all taken into account to ensure the exit strategy is workable.
- Refinance to a Long-Term Product
Elsewhere, the investor may wish to retain ownership of the property or development, upon its completion. As above, a bridging loan may be taken out to purchase the property and finance all necessary renovation works. After which, the bridging loan can be repaid by switching to a longer-term mortgage or specialist property loan.
Demonstrating the viability of this kind of exit strategy means conducting due diligence in advance. It means ensuring your credit score and financial status are up to scratch, carefully researching appropriate refinancing products and getting an agreement in principle in advance. If considering this type of exit strategy, consult with an independent broker at the earliest stage to build a better picture of the options available.
Alternative Exit Strategies
Of course, these are not the only options available for repaying a bridging loan. Other exit strategies a lender may consider viable include the sale of other assets of value, sales of shares and investments, cash redemption from the inheritance, sale of a secondary property and so on.
For the lender, the type of exit strategy you choose is unimportant. What matters is the provision of sufficient evidence to convince them you are a low-risk borrower, and that their money is safe.
Craig Upton supports UK businesses by increasing sales growth using various marketing solutions online. Creating strategic partnerships and a keen focus on detail, Craig equips websites with the right tools to rank in organic search. Craig is also the CEO of iCONQUER, a UK based SEO company and has been working in the digital marketing arena for many years. A trusted SEO consultant and trainer, Craig has worked with British brands such as FT.com, djkit.com, UK Property Finance, Serimax and also supported UK doctors, solicitors and property developers, to gain more exposure online. Craig has gained a wealth of knowledge using Google and is committed to creating new opportunities and partnerships.