Pros and Cons of Bridging Finance

Pros and Cons of Bridging Finance

Bridging finance is a flexible, short-term loan, which, in a property context, is most commonly utilised to finance the purchase of a new property against the sale of an old one. This temporary form of funding provides a financial bridge for the borrower until money becomes available to pay back the loan. In this way, it offers quick-access financial
respite to a prospective investor.

Traditionally, bridging finance has been used by residential or commercial property investors and it can be ideal where one needs to close the deal quickly on a new property, save an existing property from foreclosure, or simply buy some time until longer-term
financing can be secured. The interim nature of bridging finance holds both advantages and disadvantages. It can be very beneficial for providing a flexible form of finance for short-term
opportunities by enabling fast funding and a temporary cash injection; however, its biggest advantage is also its biggest drawback. Since the time-period within which the loan must be repaid is shorter, the individual payments will inevitably be larger.

A well-considered balancing of inherent pros and cons will reveal to a sensible investor, which side the scales will lean in any given scenario. A practical example will be where a property is purchased at auction and the buyer needs to satisfy an immediate cash deposit and then secure the remainder of the financing within the usually limited time-period. In such a case, the purchase of the property at a discount will no doubt trump the significant interest and fees usually associated with this form of financing.

On the other hand, the higher-than-usual interest rate will very often shift the balance negatively. If the repayment exit plan is not properly executed, the individual will face hefty penalty interest rates that can be a burdensome form of financial punishment. In the case of traditional long-term finance, there is an increased likelihood that a borrower may suffer
some form of financial hardship over the course of the loan-term, which will hamper repayment and can often cause insurmountable financial difficulty.

Conversely, the flexible nature of bridging finance, gives an investor control over such potential future risks by, perhaps, borrowing enough (to avoid running out of funding), by avoiding an unmanageably large amount, and by selecting a suitable term. The latter is especially important if the repayment is dependent on the sale of a property. There are various alternatives potential borrowers might consider, for example, secured loans, conventional mortgage, asset financing, and commercial lending.

However, in today’s volatile economic climate, where cash flow is a considerable hindrance for many investors, bridging finance has the overarching advantage of offering a unique opportunity to access sizeable funds and temporarily increase your liquid capital at incomparably short notice.




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