Traditionally, bridging finance was used as a means to bridge the financial gap between a property purchase and a delayed house sale. But over the last decade or so, it’s seen a big expansion. Rather than being used solely as a basic chain break solution, property professionals are now utilising it as a form of short-term funding for a variety of situations.
From developers juggling multi-site portfolios, through to novice investors dipping their toes in the Buy-to-Let market, bridging finance offers a speedy and easy solution for situations where emergency funding is needed, sudden deadlines are looming, or small-scale capital is required in a short space of time.
So, who exactly are property professionals, and what are the situations where bridging finance can help them? Here, we’ll go through a number of scenarios where professionals are able to utilise bridging finance, and how you can spot them.
Who are property professionals?
Broadly speaking, property professionals are people who work within the property industry at some level. This could range from an experienced developer intending to develop a plot from scratch, or perhaps someone who’s inherited a property, and who’s now looking for a workable financing arrangement to get it fit for the rental market.
Most commonly, though, property professionals are those clients whose sole or primary income comes from property projects — be it as developers, landlords, or investors. There are also the semi-professionals: for instance, those who ‘dabble’ in development to diversify their investment portfolio, or those who take on renovation projects in their spare time.
Regardless of the level at which they’re at, though, all of these professionals face a number of risks, particularly financial risks, which can be put into three categories:
- Access to credit: As our recent trends roundup highlighted, more than half of SME developers face major barriers in accessing finance — up 4% on the previous year. If a property professional client has already done the rounds of traditional lenders before approaching you, there’s a strong likelihood that they’ve had a frustrating time of trying to get the amount they need, when they need it.
- Time restrictions: By their nature, the best property development and investment opportunities don’t stay open for long. The auction scenario is a prime example of this: after having submitted a successful bid, the buyer generally has 28 days to make payment. The stress testing and other due diligence checks carried out by traditional lenders can often seem painfully slow. If the funding isn’t there by deadline date, the would-be buyer can be faced with a double whammy: missing out on the development opportunity, and hit with a penalty for non-performance.
- Exposure: If an unexpected project snag occurs, it might well be fixable — but only with a quick injection of cash. The longer it takes to plug the gap, the greater the overall cost, and the less profitable the project is overall. A client with a large portfolio might well have the potential to absorb any losses through profits from another project elsewhere. Smaller-scale professionals, on the other hand, don’t have this luxury.
So, with these risks in mind, how can bridging finance offer a quick solution to them?
Bridging finance: what is it, and how is it used?
When funding is in short supply, or something happens during the buying process, there can be a sudden need for quick finance. This is where bridging loans can offer a solution: they can be used as a ‘stop gap’ until longer-term finance can be acquired, or ultimately until the property is sold. This type of finance has a number of benefits, like flexibility on the size of the sum, a speedy turnaround, and leniency in what properties lenders are willing to finance. Importantly, bridging finance can directly address a number of problems related to the three categories of risk above.
To get a better grasp of where exactly it can help, though, here are some of the ways bridging finance can be utilised by property professionals.
1. Repairing a broken chain
The classic broken chain scenario can affect property professionals in a similar way to ordinary residential home buyers. In the situation where a client requires the capital from the sale of a property to complete a purchase, but that sale is held up, a bridging loan provides the short-term fix.
Landlords involved in the ‘flipping’ of properties (buying and then selling in quick succession – often after rapid renovation – i.e. ‘fix & flip’) often depend on rapid turnaround and hassle-free sale & resales to maximise profitability. If a chain is jeopardised, a bridging loan could be just what’s needed to keep their plans on track.
2. Un-mortgageable properties
When it comes to mortgaging a property, traditional lenders tend to require that properties meet a certain level of spec — a minimum habitation standard — before issuing mortgage finance. This can be restrictive, and can ultimately slow down the process of getting that finance. Yet bridging finance providers, by contrast, are typically less restrictive in this regard. So if a client is looking to fund major renovation work, this is an ample opportunity for bridging finance.
3. Small-scale conversion/renovation
In a situation where a property developer is working on a small-scale conversion, it can be difficult for them to receive funding with a quick turnaround, or even funding at all, perhaps because of the size of the conversion not requiring full-blown development finance. Here, a bridging loan might be worth looking into, due to its quick nature and small-scale availability.
4. Lease extensions
Suppose your client spots an opportunity linked to a long-leasehold property in need of lease renewal. In cases like this, traditional lenders can often be reluctant to lend where time left on the lease has reached a certain minimum point. If this were to happen, then a bridging loan might be the way forward to fund the purchase, carry out improvements and/or fund the lease extension costs.
5. Planning permission
A High Street lender has refused funding on the basis that there is no planning permission in place for the land in question. Assuming the client is very confident that permissions will ultimately be granted, bridging finance provides an alternative way forward.
6. To complete on a purchase quickly
Your client might want to push things forward, for instance to get all improvement works completed, and to flip the property in time for the prime Autumn / Spring buying season. Bridging loans can typically be arranged more rapidly than traditional mortgages — making them a valuable option where time is of the essence.
7. Traditional funding is not available to the borrower
Their income may be derived in full or in part from abroad, or they may have a chequered earnings history (especially if they are self-employed). Due diligence is of course part and parcel of applying for a bridging loan. That said, you should find that the lending criteria tend to be less rigid: good news for you and your client.
Ultimately, bridging finance can offer a flexible, tailored, and speedy solution to any funding issues that property professionals might encounter — in a variety of situations. Ready to find out more? Speak to West One today.