The world of commercial finance comes with it’s own terminology. Amongst these are a way of describing bridging loans as either open or closed.
This article will explain the key differences between open and closed bridge loans, so that you can make a more informed decision. Of course you’re always welcome to contact us at any time if you’re question isn’t answered here.
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What is a Bridging Loan and How Does it Work?
We’ll start off by defining bridging itself. A bridging loan is a means of borrowing money over a short to medium term, usually while waiting for money to arrive.
The classic use for bridging is between the purchase of one property and the sale of another, but there are many areas where quickly available short term finance has a clear value.
Bridging has a relatively high rate of interest as a consequence of its very quick arrangement and short term duration.
More commonly used than their counterpart, closed bridging loans are chosen by those with a specific time frame in mind for their finance. They are a loan with a fixed end date and a demonstrable ‘exit strategy.’
Those who opt for the closed option will be able to specify a fixed exit date at the point of securing the finance. This gives the lender a clear picture of the financial transaction taking place, and hence they are usually able to offer lower rates of interest.
Open bridging loans are needed if you’re not sure of the exact period you need the finance for.
Where the perfect property or development opportunity arises, but a previous property hasn’t yet sold, an open bridging loan provides the necessary capital to seize the opportunity.
How long it takes to pay the loan back will depend on how long it takes to sell the existing property, so in that instance open bridging finance can last as long as necessary, assuming the finance broker is happy to keep on lending.
Unsurprisingly, open bridging comes with higher levels of interest. They are also harder to find with many lenders only offering closed finance.
Open Vs Closed Commercial Bridging Loans
For commercial borrowers, the same terminology applies and both types of loan are available to businesses.
Since commercial bridging is unregulated, borrowers will need to be vigilant around reading the fine print and ensuring there are no punitive exit fees or other hidden charges.
Closed loans are often useful for businesses when they move premises. If the new premises has a fixed completion date, along with a fixed sale date for the current, closed bridging finance makes complete sense. If there is no buyer yet, then open bridging would be the right choice.
All lenders will charge you penalties if you fail to exit the loan within the agreed time frame. These can range from an extra percentage of interest to substantially more. With this in mind, a clear exit strategy is paramount for any potential deal.
Do You Need a Bridging Loan Calculator?
Use our free bridging loan calculator here.
In the meantime, do get in touch should you wish us to help you source the best possible bridging finance for your situation. This service is free (we get paid a small commission by the lender) and means you can take advantage of our wide range of contacts with lenders to receive the best offer straight away.
Specialist help at securing the right finance for you.
Here at Business Expert, we offer specialist help at securing the right finance for you. We have contacts with multiple lenders and our concierge service is there to help you source the right provider for your situation.
Do make contact if you would like to talk with one of our advisers about your requirement.