There are two main types of bridging loan; a ‘closed bridge’ and an ‘open bridge’, and each have key differences says David Kinane, partner at Paxton Private Finance.
A ‘closed bridge’ is a loan where, before the bridging loan is taken out, the borrower sets out a predefined and planned exit to repay the loan.
“In this instance, the borrower knows a source of funds will be available to repay the loan before the end of the term,” states Mr Kinane.
“Although bridging finance lenders normally require a detailed exit plan, with an open bridging loan this is not the case.”
He explains that an open bridging loan can be required when the borrower needs to settle a transaction in a very short time period, and has not had the time to arrange funding.
“In these instances however, the borrower may have a longstanding relationship with a mainstream lender that is very likely to advance the loan, but the borrower has not had time to submit an application.”
“It may also be the case that the borrower’s planned exit from the bridging loan is through the sale of the property, a route that has become more common in recent times due to the lack of long-term finance facilities offered by the banks.
“This type is bridging loan is therefore ‘open’ whilst a buyer is sought.”
Alternatives to bridging loans include bank overdrafts facilities and short-term asset finance, points out Rob Jupp, chief executive officer of Brightstar Financial.
“Short-term asset finance specialises in short-term loans made against personal assets such as antiques, paintings, luxury cars and jewellery,” he says. “Medium-term borrowing can also be achieved through second charge secured loans.”
Mr Kinane adds that recently there have also been an increasing number of long-term lenders coming onto the shorter-term market, “while alternatively there is also the option of using private equity to support a transaction”.
Private equity providers offer a quick turnaround time but can be expensive and often borrowers will relinquish a certain amount of control over the transaction.
Danny Waters, CEO of Enterprise Finance, believes the bridging loan is a unique product with no comparable products on the market quite as flexible and timely.
“No other financial product can give borrowers access to potentially sizeable funds in a matter of days,” he says. “Bridges tend to start at around £30,000 and have no maximum limit.”
“OK, you can always remortgage or take out a secured loan to raise capital but these will take far longer to arrange.”
As with all finance, brokers need to be sure of their client’s needs and provide suitable options.
The guiding rules must be based on a client’s ability and intent to repay, understanding of the nature of the facility being offered and best and worst case scenarios in the event of being unable to repay or refinance.