As with any form of finance, borrowers should be well informed when it comes to the potential risks.
In this article, we’ll outline the risks involved with bridging finance and what you can do to protect yourself against them.
As with any loan, become unable to keep up to date with repayments is perhaps the most serious risk. This is especially the case with bridging as the interest rates are relatively high, as befits the short-term nature of the finance.
Since all bridging finance is secured, defaulting on the loan is going to put your asset at risk. Creditors have a variety of legal options are their disposal to compel you to pay which include county court judgements, statutory demand letters and ultimately a winding up petition which could force your company into liquidation.
Exit Strategy Failure
Since bridging finance is a loan intended to cover the space between two clear points, the exit strategy is an essential part of the process.
Usually this is the selling of a property and, where the sale falls through – for whatever reason – bridging lenders can find themselves caught between a rock and a hard place.
The failure of the exit strategy is also worth considering because selling a property depends upon factors outside of your control, such as the state of the housing market.
Whatever your exit strategy is, it would be wise to consider a contingency plan should that situation arise, which may involve extending the finance. Correctly planned finance always factors in enough financial space for whatever eventuality arises.
Breaching the Terms of Your Bridging Loan
It’s worth stating that commercial bridging finance is, as yet, unregulated in the UK and this means that lenders are at liberty to insert their own terms and conditions. You need to read the fine print very carefully before signing on the dotted line to understand what the fees, payments and charges are, and when they’re due.
You also need to understand what the agreed terms of the loan are ensure you do not breach them. Many lenders prohibit the renting of a property while it is waiting to be sold for example, so borrowers who choose to rent their property without realising this might risk property repossession.
Does a Bridging Loan Affect Your Credit Score?
Credit scores are affected by the number of recent applications, so if you were to apply unsuccessfully for a loan it would be indicated on a subsequent credit check, unless a period of time elapses.
Bridging loan providers are less concerned by particular credit ‘scores’, however, as compared with mortgage lenders. Obviously, companies with good credit are more attractive to lenders but it is certainly possible to obtain bridging with credit issues in place.
To Minimise Risks, Check the Fine Print
Perhaps the biggest risk with bridging finance is to enter into an agreement that may hold surprises for you. Since many people seek bridging loans in a state of urgency, perhaps chasing a particular property deal, it can be too easy to race through the process without doing your due diligence.
Our suggestion is to take professional advice, and ensure that any document you are signing is clear, transparent and understood.