Minimum requirement for applying for a bridging loan
There are times for any business when a large amount of money is required to bridge the gap until funds are received from another source. This scenario is commonly covered by a financial facility called a bridging loan and offers the most cost-effective and convenient solution to provide the needed funds. The loans are specifically designed to provide finance quickly over a relatively short-term. The term of the loan (repayment period) can last anywhere from just a day to 18 months. However, most lenders only offer a maximum term of 12 months and others just 6 months.
It is important to keep in mind that a bridging loan is a short-term financial solution. This means that it can be much more expensive than a loan option that has a longer term. This is primarily due to the higher interest rate that is charged for short-term loans in comparison with the low interest for long-term loans. Requiring an extension on the loan can also lead to additional charges and penalties.
What are the minimum requirements to apply for a bridging loan?
The following are some basic requirements for taking out a residential bridging loan:
– You will need to provide the lender with a reason for the loan or what the funds will be used for.
– You will need to offer collateral as security for the loan such as real estate or an asset of relative value to the principle loan amount.
– You will need to offer an exit strategy for the loan. This strategy refers to how and when the loan will be repaid. This could be when you receive the proceeds from the sale of a property, funds received from an investment, from money that is owed to you, through refinancing or upon the receipt of payment from the completion of a project.
– If the loan will be repaid from the proceeds of the future sale of a property, the lender will need to be satisfied that the asking price is realistic and sufficient to cover the loan and that there is a demand for the property.
– If the loan is to be repaid through a process of refinancing, then the lender will need to be assured that finance raised will be sufficient to cover the amount of the loan.
– The lender may also need to be satisfied that you have the ability to arrange long-term finance to repay the bridging loan should your exit strategy fail before the term of the loan expires for any reason. It is always recommended to have a second repayment option available to you when taking out a bridging loan whether the lender requires this or not.
If you require short-term finance, a bridging loan offers the simplest and least costly means of raising the required funds quickly. However, it is recommended to speak to a financial advisor or loan provider to find out if there are any alternative arrangements that can be made to better suit your needs. If a bridging loan is the best option available, then it is crucial to a have a viable exit strategy.