Often than not, individuals find themselves in financial crisis especially when one wants to goal in that certain important property or home renovation, business acquisition or tax liability that one finds it unmistakably confused in thinking up of ways to bridge the gap in personal funds.
Now, there is such an arrangement in attaining instant financial solution. This method is called bridge finance, as the word implies, it is a way in bridging finance for an individual in order to purchase or acquire business and property or to pay-off home renovation and tax liabilities.
It is often used in bridging in the cash in-flow while expecting the turnout of the traditional mortgage or loan applied from the bank or lending company. It is a cash outlay, off-set or reimbursement to cover up an individual’s sort of “spur of the moment” financial situation.
Bridge Finance is used by investors and lending companies as well as banking institutions. A common practice in the financial world to maintain the flow of cash operations this method is well-used particularly, when financing is required for a brief period of more or less 28-60 days. Hence, the so called, short term finance.
There are only two types of bridge finance, Open and Closed Bridging.
Open Bridging :
It is a high risk lending scheme, especially for the lending institution. Oftentimes, the borrower has no definite or prospective buyer of the property being sold hence, does not state the exact date for the bridging finance to end.
Closed Bridging :
A fixed date is scheduled upon repayment of the finance. Therefore, this scheme is more favourable to the lending institution, an also a surety that interest charges are lower.
To date, bridge finance can be absolutely used for any intent. Customarily, it completes on one property sale while awaiting the sale of another but now it also has other purposes such as:
Auction Purchases :
Usually, a deadline is given at auctions – a timeline of 28 days is needed to secure purchase of the bid now bridge financing come in the picture to secure the needed funds for the client not to lose his deposit and time to arrange mortgage or loans from banks.
Renovating Property or Buy to Sell Property :
Here a client can take out a bridging finance wherein he or she can renovate the property to sell at a certain profit or take out a mortgage and keep that property for the purpose of investment.
Below Market Value Purchase :
Lending institutions offer bridging finance which is often based in the property’s open market value. Here, the client can acquire the said property without putting in any cash.
Cash-flow Assistance :
Small and Medium scaled enterprises are sometimes in a position wherein they are short in cash flow. Here, bridge finance, steps in to give financial assistance while bidding time for these companies while awaiting the release of their mortgages and loans from banks. Thus, getting through their deals and not subjected to being bankrupt.
Overseas Property Acquisition :
Nowadays, we have a very active overseas property market, since investors see this as an opportunity to purchase below market value properties and here clients are subject to decide to go for an off plan development and require the deposit in an instant. Again, bridging finance is used to purchase such property and investors take legal charge of the client’s local property that can be arranged for re-mortgage to redeem the bridging loan.
Meeting Tax Liabilities :
Companies take out bridging loans to secure payment on their business tax and charges while waiting the approval and release of loan/s from bank/s.
Business Acquisition :
In acquiring a business, bridge financing can also be an excellent way to finance especially if the buyer has no first-hand knowledge and familiarity in handling a business. It also gives the client hassle free obligations especially when one has no accounts or proposals to show the bank for loan or mortgage requirements.
A criteria has to be met by these lending companies, as such here are the following:
1. Amount: 25,000-500,000
2. Duration: 1 day to 9 months
3. Purpose: Any legal purpose or property purchase
4. Location: Country of origin
5. Leasehold Properties: Minimum of 75 years
6. Age Limit: 18 to 65 years old
This is a sample percentage of an underwriter’s percentage requirement in property purchase:
- Investment residential property – up to 65% LTV
- Refurbishment – up to 60% LTV
- Semi or Fully Commercial Property – up to 50%
Upon completion and approval of this short term finance, funds are released to purchase the client’s property after which, it refinanced with a re-mortgage. Equity will then be released to the client after all the parties have agreed to the legalities, fees and costs that took place during the property acquisition.
Surely, when one is granted a financing there are always the term wherein one is obliged to pay their financial dues. Options are as follows:
- Monthly Repayment
- Retained Interest
- Blended (a combination of Monthly and Retained Interest Options)
- Rolled Up (interest are all added in the loan)
One must consider before applying for a bridge loan is the reputation as well as the quality of services rendered by the lending company. Also, consider the speed – a decision is usually made a little or more than an hour with an average of loan completion of five days. A flexible approach – looking at deals with its own merit and still, if it does not fit the criteria, then how about trying to look at the whole picture unconventionally, so as to be considered. Decision Making – the point of contact wherein there is assurance in expediting the formal offer of the lending process.