19 Oct How Bridging Finance Works for Business
What is bridging finance?
Bridging finance is a key form of short term funding. It exists to ‘bridge’ the gap from one lending requirement to another, and is used until you have a more permanent (and generally traditional) funding arrangement in place.
Bridging finance is generally quite quick and easy to establish, allowing you to act quickly on opportunities as they arise. For example covering the time between buying a new property and selling your old one.
Who uses bridging finance?
Bridging finance is commonly used in the residential space. A property owner has found their dream home and needs to sell their existing property. Or a family wants to stay in their home while their new home is being built.
From a commercial perspective, developers will use bridging finance to carry a project while permits and development approval are sought from council. Once the DA is held, the project instantly becomes more attractive to traditional lenders and the bridging finance is paid out, generally through conversion to a conventional construction facility.
Bridging finance can be used in a corporate setting to ensure business continuity when a partner or family member is exiting the business. Payout of the facility can then occur through partner buy-in or traditional long-term financing arrangements.
How does bridging finance work?
Bridging finance is calculated by adding any debt owing on the existing property to the loan value of the new property. This gives the borrower the freedom to purchase the new property prior to selling the existing.
Bridging finance is generally interest only and exit strategy based. Payback occurs via the sale of the existing property or through refinance.
Closed vs Open?
A closed bridging loan is used where you have a contract of sale on your property and know the date you will settle and receive the funds to payout the facility. These loans are considered less risky and are priced accordingly.
An open bridging loan is used where you haven’t got a set date for payback of the facility. Given the uncertainty surrounding this type of scenario your lender may require proof that the property is being actively marketed for sale. The lenders pricing will reflect the added risk.
What are the benefits?
Flexibility.
Bridging finance removes the stress of lining up settlement dates. Thus, allowing you to purchase your new property without feeling obligated to accept a lower price for the sale of your existing property first. We are seeing a number of clients choose to take out a longer term on their bridge loan to ensure they can maximise their sale price during this time.
Convenience.
You don’t need to have sold your existing property before purchasing the new one. Bridging finance allows you to raise funds quickly and complete your purchase. Best of both worlds.
The right fit.
Bridging finance gives you the freedom to find the right long-term arrangement for your new property funding. Also, you have the benefit of not having to rush your existing property to market and potentially lose out on the right sale price.
It often doesn’t matter what your credit rating is.
Because bridging finance is exit strategy based the specifics of the security are considered, not necessarily your lending history.
Interest capitalization.
Interest for the bridging facility is generally capitalized. This means the interest is rolled back into the debt and is paid at the time the facility is paid out.
What are the risks?
The biggest risks in bridging finance are the possibility that you don’t obtain the purchase price for your existing property that you were hoping to receive or that the sale takes longer than expected. You need to have a clear exit strategy in place.
In case your existing property takes longer to sell than anticipated, and to help reduce your total loan amount, it’s a good idea to continue making your standard repayments so you’re not left with a sizeable debt to pay back at the end.
Bridging finance is a specialised form of finance, it’s worth getting advice from a funding specialist to ensure you understand all the loan features and requirements of the facility. Talk to us to find out more.
You need to have done your homework to ensure that your permanent, long-term funding will come through. We can help organise this for you.
What to consider before taking on bridging finance?
- How long will you need the funds for?
- Is it commercially viable?
- How long are properties like yours taking to sell?
- What’s the general market like in your suburb?
- Do you need to do a valuation to understand the resale value of your property?
- What is your ‘Plan B’? If your property doesn’t sell as quickly as expected what will you do?
- Are you building or purchasing an established property?
- Will you be able to meet the repayments for bridging finance?
- How quickly can you get your existing property ready for sale?
Why IBN Private?
We can help source your funding requirements from go to woah.
We have direct relationships with funders who specialize in bridging finance, as well as traditional mainstream lenders.
We are your one stop shop for your funding needs.
Our funding process is simple, and our team is highly experienced and acts with authenticity.
We can give you an indicative answer within minutes and aren’t bound by restrictive banking policy like traditional lenders.
This puts us squarely in position to support you in your decision making for your business needs.
Contact us to get the ball rolling.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.