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In the short-term property finance sector, bridging loans have become particularly popular with UK developers, businesspeople, and investors looking for quick access to funds. Whether you are acquiring a property at auction, financing a refurbishment, or breaking a property chain, bridging loans offer unparalleled flexibility and speed.
Which are often impossible to find with mainstream lenders. However, while securing the loan may appear to be a milestone, one equally critical aspect is your exit plan.
For lenders, the exit strategy is the most important part of the application process, and a clear plan of how you intend to repay the bridging loan is what will lead you to the finishing line.
What is an Exit Strategy?
An exit strategy refers to the method a client plans to use to repay the bridging loan after the time limit. However, with these types of loans, clients are expected to pay back between 3 to 18 months. Due to this short time, lenders are expected to have a reliable plan to facilitate payment of the loan, along with the interest, within the specified timeline.
Why Exit Strategies Matter.
Commercial bridging loan also stand out from other types of loans, such as mortgages, because they do not offer long repayment periods or the same repayment options and flexibility.
The speed at which lenders work puts them at greater risk, hence, they are more concerned about repayment.
Without a clear, detailed, and practical exit strategy, which outlines how you plan to pay off the loan, your application is likely to be rejected, irrespective of the property’s appraisal and your financial history.
Additionally, failure to stick to the timeline of your exit plan may entail:
- Excess fee charges or a higher interest rate
- Forced sale of the collateral property
- Adverse effect on your credit report
- Lawsuit by the lending organization
Most Prevalent Exit Strategies in the UK Market
There are quite several established strategies for bridging loans in the UK market, which are backed by consideration for exit strategies:
1. Converting the bridging loan to a long-term one or mortgage
This plan is by far the most utilized strategy and begins with a bridging loan used for quick purchases or fast renovations. Then, the borrowers refinance with a buy-to-let mortgage or commercial loan to pay off the bridging loan.
2. Sale of the Property
Another common exit strategy is selling the property after value addition through refurbishment or development. This is typical for property developers or investors who flip residential or commercial assets.
3. Business Revenue or Cash Flow
For trading companies, particularly those utilizing the loan for working capital or tax obligations, repayment can be achieved through heightened cash flow or profit earned within the term of the loan.
4. Inheritance or Other Incoming Funds
In certain situations, borrowers intend to pay back with incoming lump sums, like inheritance, bonuses, or the maturity of another investment. Although less frequent, it can be tolerated with documentation.
Conclusion
Take the time to evaluate your options, talk to financial experts, and line up your exit strategy with the same care you put into entry. After all, how you exit the loan is as important as how you enter it.
