Data from the Association of Short Term Lenders shows that the UK’s bridging sector grew by 15% over the past 12 months alone. This would suggest that more businesses and private borrowers than ever before are considering fast-access bridging finance.
Even so, both the sector and the subject of short-term finance remain rife with myths and misconceptions. Many of which continue to cast unfair and outdated shadows on one of the UK’s most dynamic lending sectors.
To help clarify some of the main areas of confusion, what follows is a brief overview of 10 long-standing bridging loans myths, which continue to perpetuate even today:
Myth #1: You Need a Good Credit Rating
One of the biggest benefits of bridging finance is its accessibility. Bridging loans are issued on the basis of security (aka collateral) in the same way as any other secured loan. But with bridging finance, credit ratings are of far less significance than with comparable products.
Credit checks are conducted as part of the application process and a good credit score will often pave the way for a competitive deal. Interest rates and borrowing costs may be higher for those with poor credit, but a low credit score will not necessarily count you out of the running.
If your security for the loan is sound and your exit strategy is viable, you have every chance of qualifying – irrespective of your credit score.
Myth #2: It is Better to Get a Loan from a Large Bank
The fact that bridging finance is not available via most of the usual High Street channels renders this suggestion nonsensical, at least when it comes to short-term, fast-access finance that can be used for any legal purpose.
Even where a major lender has a similar product available, they cannot offer the same kind of personalised service as an independent lender. Smaller lenders demonstrate greater flexibility and consider all applications by way of their overall merit.
With a specialist bridging lender, every contract is a bespoke agreement, tailored to meet the exact requirements of the borrower. With a major lender, the overwhelming majority of products are prefabricated – i.e. the same for everyone.
Myth #3: There is a Limit on How Much Can Be Borrowed
This is true, but only with regard to the value of the assets used as security for the loan. Maximum bridging loan values are based on the assessed value of the applicant’s collateral, up to the agreed LTV.
For example, if you have viable on-hand assets worth £500,000, you could be offered an 80% LTV bridging loan of £400,000. If you plan to secure the funds against a property you intend to buy with a value of £1 million, the same 80% LTV could be taken out at £800,000.
Your exit strategy and general financial status will also factor into the maximum loan amount the lender is willing to issue.
Myth #4: Getting a Loan Takes a Long Time
One of the biggest points of appeal with bridging finance is how quick and easy it is to arrange. With all the required documentation and supplementary evidence in place, it is possible to arrange and access a bridging loan within just a few working days.
This pales in comparison to the weeks (or even months) it can take to arrange a conventional loan or mortgage. Bridging finance can therefore be ideal for covering the costs of time-critical purchases and investments.
Myth #5: Bridging Is a Loan of Last Resort
Quite the opposite, as more borrowers than ever before are turning to bridging finance as a first resort option; bridging finance has the potential to be faster, simpler and more cost-effective than any comparable High Street loan.
In addition, the flexibility of bridging finance opens up the facility to a much broader audience of prospective borrowers. Unwilling to wait weeks on end to get their hands on their money, households and business borrowers alike are taking their business to bridging finance specialists in droves.
Myth #6: Bridge Financing Is Too Expensive
This assumption is tied to the fact that the APR on a bridging loan can be comparatively high. But what tends to go overlooked is how bridging finance is designed to be repaid as promptly as possible – typically within less than one year.
For example, short-term bridging finance for a property purchase and development project could be issued at a monthly interest rate of just 0.5%. If the borrower repays the facility within a few months, the total interest payable can be kept to the bare minimum. There is also usually the option of repaying early for even bigger savings.
Bridging finance interest rates and borrowing costs only become comparatively expensive when the funds are not repaid promptly as agreed.
Myth #7: The Penalty for Defaulting Is Severe
The truth or otherwise of this suggestion varies from one lender to the next. True, some lenders do impose heavy fees and penalties for defaulting. Elsewhere, others do not charge default fees at all.
In all instances, bridging loan specialists are more inclined to support struggling customers than to punish them. Where borrowers consult with their lenders ahead of a potential default, agreements can be reached to prevent penalties and late payment fees becoming necessary.
There are always options to explore to avoid defaulting, none of which need necessarily involve additional fees or penalties.
Myth #8: Bridge Financing is the Wild West
Short-term lending was once considered the Wild West of the UK’s financial sector. High-value loans with even higher interest rates were issued on a whim and borrowers who clearly couldn’t afford such facilities quickly found themselves in dangerous debt spirals.
Today, it is practically impossible to get away with this kind of reckless behaviour. Lenders across the board have no choice but to abide by a strict set of conduct rules, set out by the FCA.
In addition, competition on the bridging loans market is at an all-time high, pushing costs lower and standards ever higher. Working with an established and reputable lender, there has never been a safer time to consider short-term bridging finance.
Myth #9: Bridging Lending Is Complicated
As unfamiliar as the sector may be to some, applying for a bridging loan can be surprisingly straightforward. You simply need to provide your lender with evidence of a viable exit strategy and have sufficient assets of value to cover the costs of the loan (security).
Most other factors are inconsequential – your employment status, your income level, your professional background and so on. Even a history of poor credit or bankruptcy will not necessarily stand in your way.
The key to getting a good deal on a bridging loan as smoothly and simply as possible lies in enlisting experienced broker support from an early stage. Your broker will handle all aspects of the application on your behalf, negotiating with a panel of top-rated lenders to find you an unbeatable deal.
Myth #10: The Lender May Not Always Have the Right Funding Structure in Place
An experienced bridging lender with an established track record will never promise credit facilities they cannot deliver. In the past, it was not uncommon for a short-term lender to reach an agreement with a client, only to subsequently delay payment, or only provide them with a portion of the funds needed.
This was and still is a highly irresponsible approach to lending and has largely been eradicated across much of the UK’s specialist lending sector.
Though again, the key to getting the best possible deal with a bridging loan lies in seeking qualified broker support at an early stage.