Specialist Finance –
Bridge financing: five common myths and misconceptions
Despite its popularity and increased media coverage, there are still lingering ideas on what bridge financing is. In this piece we discuss five of these common “myths and misconceptions”, to help better understand this popular source of finance.
Bridge financing has provided an essential source of funding during the pandemic and the market looks set to remain busy. As we move through the national lockdown, it’s important for individuals and businesses to understand the options available to them. For this popular type of financing we have identified five common myths and misconceptions.
1. Bridging is a loan of last resort
Bridging was often viewed as a last resort for people who have left financing too late or were unable to secure it elsewhere. This is no longer the case.
Ultimately, property professionals seek bridging to overcome a short-term need, their immediate strategy may not fit within a term loan and they do not want to be saddled with the Early Repayment Charges (ERCs) that term lenders may require.
For many experienced investors and developers, bridge financing is the first choice to support their short-term property strategy. It is also becoming a more common funding choice for smaller property developers. Whilst there are different levels of complexity depending on the type of funding, lenders such as Arbuthnot Specialist Finance Limited (ASFL) will always sit down with a developer or investor to go through the loan structure in detail before progressing. Eligibility and due diligence criteria always apply.
2. Bridge Financing is too expensive
Historically this type of financing has been more expensive compared to other forms of lending. This was due to the higher level of risk taken on by the lender in the days where bridging was thought to be a last resort. It must be remembered that bridging is used when the strategy is short-term, for example, when a property professional is refurbishing before selling on. The bridge loan is used until a term solution is required. However, lending is fully analysed, and priced on a risk basis, as such rates have noticeably decreased. The sector has become increasingly competitive, with cost levels varying significantly depending on the lender. At ASFL, we offer interest from 0.6% pcm.
Bridge financing can also be more expensive than other forms of lending as independent bridge lenders typically have an external credit line which is used to provide loans to clients. But lenders such as ASFL who are part of a bank do not need to rely on an external credit line, reducing the extra cost passed on to the borrower.
It is also important to look at the fee structure of a bridge loan. The cost of some loans can be difficult to understand and it is critical to work with a provider that is transparent and up front on costing. One of ASFL’s USPs is that it does not charge any extra fees. That means no early repayment charges, no exit fees, no minimum interest period fees, and no non-utilisation fees. ASFL only charge interest on the amount of debt outstanding at any time (interest is charged daily), making it easy for clients to understand the total cost of the loan.
3. The penalty for defaulting is severe
Default penalties in the bridge market are generally high. ASFL does not charge default fees. Instead, the focus is on the client relationship and communication, to help work out what has gone wrong and to suggest remedies. For example, the property in question might need to be marketed differently or a new marketing agent selected.
4. The lender may not always have the right funding structure in place
Many lenders are dependent on an external credit line, which can lead to inconsistencies in providing or maintaining funding for clients. Cases may arise where a lender is not able to secure the funding, meaning clients may be let down during the agreement, especially if they are carrying out a refurbishment or development.
At times, clients have come to ASFL because their original lender was only able to fund a portion of the promised loan. It is important to understand the capabilities of your lender and to have honest and frank conversations about what you will need from them and when.
5. Bridge financing is the wild west
There was a time when loans were offered with no consideration of the exit strategy. Some saw bridge finance lenders as eager to repossess property, with an appetite for charging high interest rates and a ‘hard sales’ approach.
However, an influx of property professionals into the bridge finance market has seen the sector change. Lenders who understand your industry and the details of your requirements are better placed to assess and service your lending needs.
As the market has become more competitive, customer service and lending standards have only increased. It is best practice for lenders to prioritise the client, so that both parties can work together on similar projects again. At its heart, true bridge finance is a relationship led business.
At Arbuthnot Specialist Finance Limited we have the ability to provide a full range of real estate finance solutions for transactional, refurbishment and development projects throughout mainland UK.
Registered in England and Wales No. 11103603. Registered Address: Arbuthnot House, 7 Wilson Street, London, EC2M 2SN. Arbuthnot Specialist Finance Limited is not authorised and regulated by the Financial Conduct Authority.