Bridging loans have become a dependable financing option for UK small businesses and property owners. With the current economic conditions, more people will likely turn to them to complete their property projects, manage cash flow issues, and buy or sell properties. According to a Mintel report, the bridging market is expected to grow by 44% from 2022 to 2027. Although these trends are positive, there is still a need for better understanding among new borrowers.
Through extensive analysis of case studies, we have identified the most common mistakes people make when applying for a fast-bridging loan. If you are considering getting a commercial or residential bridging loan, this article is for you. You will learn about these mistakes and how to avoid them.
Table of Contents
An Overview of Bridging Loans
Bridging loans have become popular for businesses and homeowners seeking short-term financing solutions. Typically secured against property, these loans can be obtained through peer-to-peer lending platforms, providing quick access to large sums of money that cannot be obtained through traditional mortgages.
While bridging finance offers many benefits over traditional mortgages, including fast access to funding, it is important to note that these loans typically have higher interest rates and shorter repayment periods. Failure to manage these factors carefully can result in defaulting on the loan.
Mistakes To Avoid with Bridging Loans
Identifying common areas where mistakes can be made while taking out a bridging loan is crucial to avoid potential pitfalls throughout the entire process. By being aware of these areas, you can easily avoid them and increase your chances of success when securing a bridging loan.
Less Market Knowledge
One of the most common mistakes borrowers and investors make is failing to fully understand the market and rushing to secure a loan without researching the best available options.
For borrowers, this can lead to difficulty repaying the loan, while for investors, it can impact profitability due to limited investment options.
If you want to avoid these issues, there are two main solutions. Firstly, find a reputable broker who can provide access to multiple loan options and help find the most suitable lender or borrower. Secondly, signing up for a peer-to-peer lending platform, where your data is matched with appropriate loan options, saves time and ensures the best deal is secured.
Missing Cost Comparison
When opting for a bridging loan the UK, it is essential to account for all costs. Though it may require time and experience to estimate the expenses in a project accurately, it is crucial to identify and fulfil all financial gaps beforehand.
For property investors, finding the right investment option is key to securing a profitable project. It is important to ensure that the property’s value will increase after development, covering all expenses after loan repayments. It is also necessary to consider the interest rate and repayment terms that suit your capacity.
To make correct estimations, it is crucial to determine all the costs involved, including broker fees, valuation fees, stamp duty, and other expenses. Additionally, it is essential to account for the project’s timeline and inflation, which may affect interest rates.
Failing to consider these factors may impact profits and incur additional costs for bridging finance.
Poor Exit Strategy
An unclear exit strategy can cause significant problems when taking out a bridging loan. An exit plan is a defined strategy that shows the lender how you intend to repay the loan.
It is crucial to note that the exit strategy must be both clearly defined and feasible. If the strategy is unclear or not believed in, it may be challenging to repay the loan.
Having a well-defined exit strategy can also help alleviate loan conditions. New borrowers may not fully appreciate the importance of an exit plan, which can result in difficulties when repaying the loan or exceeding budget constraints.
Bad Spending Habits
While getting a loan approved can be a major accomplishment, many borrowers fail to plan their spending effectively. It can result in a lack of prioritisation regarding where the loan money should be spent, causing them to spend money on less important tasks.
This mismanagement can lead to increased expenses and depleted funds, ultimately causing them to run out of money before completing their projects. As a new borrower, it is crucial to plan out cash flows before taking out the loan to ensure funds are allocated to specific areas requiring attention.
Not Checking the Property Effectively
Many borrowers who have taken out bridging loans have faced issues because they did not conduct proper due diligence on the purchased properties. It is important to visit the property with a builder or architect to understand the costs involved in any renovations or repairs that may be necessary.
Other pitfalls to watch out for include a failure to secure planning permission, which can result in delays or even cause the project to be abandoned altogether. Discovering problems such as subsidence or asbestos can be extremely expensive and make the property unappealing to future buyers or tenants.
Weak Valuation
Before approving a loan, most bridging finance providers need a property valuation to be carried out by an RICS quality surveyor. This valuation is usually the basis for determining the loan amount and potential profits.
If you rely on valuations provided by unqualified individuals, you may face financial difficulties in the future when it comes to renting out or reselling the property. Ensuring that a qualified surveyor does the valuation is important to avoid such issues.
Conclusion
Bridging loans can be a useful tool for businesses and property owners, but it is essential to understand the potential pitfalls and mistakes that can arise when securing these loans. By avoiding these common mistakes, such as not conducting proper due diligence on the property or failing to plan out cash flows, borrowers can increase their chances of success when securing bridging finance. Understanding the market, costs, exit strategy, and property valuation is crucial before signing up for a bridging loan. Overall, seeking advice from reputable brokers or peer-to-peer lending platforms can provide valuable insights and ensure the best possible outcome.
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