What do private client advisers need to know about bridging finance?

Understanding regulated and regulated bridging

There are two types of bridging loan: unregulated and regulated loans.

Regulated bridging loans refer to cases when the property used as collateral is the borrower’s principal property, i.e., where they currently live or plan to live.

An unregulated bridging loan involves a property that the borrower owns but does not live in. It might be part of a more extensive property portfolio, a buy-to-let property, holiday home and so on.

The distinction between regulated and unregulated bridging is important because there are different rules around affordability for each. We exclusively offer unregulated bridging loans against residential property.

Open-ended and closed bridging loans

When lenders talk about open and closed bridging loans, they refer to when the borrower repays the bridging loan.

Cases where borrowers have a fixed date on which they will pay back their loan are known as closed bridging loans. Lenders offer these loans when there is absolute certainty the funds needed to repay the loan will be available to the borrower by an exact date.

Open bridging loans describe scenarios when borrowers don’t know exactly when they will repay the loan. This doesn’t mean there isn’t a fixed loan term and an absolute final date when the borrower must make repayment in full. Instead, it refers to the fact that there is some flexibility on when this will be within specific parameters.

Liquidity finance

We said we’d cover other uses of bridging finance: here we are. As well as offering unregulated bridging finance for relatively common scenarios (buying a property quickly before the borrower refinances, for example), we also provide liquidity finance.

The basics of this type of loan are the same – this is a short-term loan against prime, residential property. However, we are happy to see the loan capital deployed in ways that extend beyond property purchases. Liquidity finance allows borrowers to pursue ambitious projects or solve cash-flow problems.

Borrowers can use liquidity finance to:

• To invest in ambitious ventures (investments, diversify assets, etc.)
• As a way to create liquidity to solve problems
• Grow a business (acquisitions, investment into growth, working capital, etc.)
• Invest in a high-ROI project
• Buy other appreciating assets
• Consolidate or pay off debt

Bridging loans as a fast, short-term lending option

Bridging loans are only ever a short-term lending product.

They can last anything from a few weeks to around 24 months in length, although 12 months is relatively standard. One of the characteristics of this type of finance is that it is swift to arrange – borrowers can draw down funds in 2-3 weeks, making them attractive for various reasons.

Why do we offer liquidity finance?

If you have a client that needs to borrow £1 million or more, they may need to do so with real speed – perhaps a couple of weeks or a month. However, banks and other lenders can rarely lend this fast. Despite having a significant net worth and assets, your client may not have enough cash available to pursue their project or solve a problem they are faced with, so, lending imperative.

Selling assets is usually an option for your client, but this isn’t always practical or desirable for many reasons. When faced with time-sensitive opportunities or problems they need capital to pursue or solve, high-net-worth individuals often need a fast solution and capital that a lender is happy to see deployed in relatively diverse ways. Not all lenders can cater to short-term loans that can be utilised so broadly, despite considerable need in the market. We aim to help underserved borrowers (be these individuals or to UBOs via their entities or corporations) and our liquidity finance solution covers these scenarios.

Exiting a bridging loan

The exit plan (how the borrower will repay the loan) is a critical element of this type of finance, and we need to know the borrower’s plan for their exit in initial discussions.

Three types of exit are usual:

• Refinance with another lender (the most common scenario)
• Repayment of the loan through a liquidity event
• Selling the asset and using the proceeds to repay the loan

Often, bridging finance is used as a stop-gap solution when a conventional loan (i.e., bank loan, mortgage) will take too long or is impossible to execute in the timeframe available. In these cases, a borrower will use a bridging loan to access the required capital quickly, using the bridging loan term to approach long-term lenders and arrange finance. The lender that offers refinance will repay the bridging loan, and a borrower will effectively switch to a longer-term financing product, usually with lower repayments. This process is practical, standard and is generally easy to execute. The borrowers that we offer loans to typically have no problem organising refinancing; they usually need our services because traditional loans take too long to arrange in the time they need.

Liquidity events are also common exit strategies. In these cases, a borrower will usually receive a significant sum of money that they can use to repay the loan outright – the sale of a business, inheritance, divorce settlement or disposal of assets are all usual. A liquidity event could also be something different. We are open to this, provided it is feasible, and there is certainty of when it will happen within the timeframe the borrower says it will.

Finally, many borrowers dispose of the property used as security and arrange for the property sale proceeds to refinance the loan. This is relatively straightforward, although we will be looking at the asset, its location, its value and how much the borrower will put it on the market for to influence our lending decision.

Considerations

Bridging finance is not right in every scenario, and it is more expensive than traditional lending: we don’t shy away from this. If you are unsure of the benefits or if it is something your client should explore, get in touch. We are happy to talk to you about how our loans work and explore transparently if it could be feasible and beneficial to your client.

Cost is always important, but it can be helpful to know that it is rarely the only consideration for borrowers. Other influencing factors can include:

Speed

Using bridging loans/liquidity finance is a much faster way to access capital than is possible with conventional debt (i.e., bank lending). This means it can be a great option if your client needs capital quickly to solve a problem or move ahead with a project.

Faster than selling assets and future appreciation costs

It can be more advantageous in the long-term for your client to use a bridging loan than it is for them to sell assets to generate the capital they need. Assets and investments can appreciate over time, and your client can lose out on the upside of this if they don’t retain ownership of them. Selling assets can, in some cases, also create liabilities that are either hard to pay off or that amount to more than the loan cost without also benefitting from the upsides of retained ownership.

Opportunity cost

The cost of the loan can be significantly less than losing out on a project that will offer a great ROI opportunity for your client. Here, it can be easier to understand how the numbers work if your client knows what they are likely to gain in figures from investing in an opportunity they need capital for. Borrowing can be significantly cheaper – if your client encounters a scenario where this may be a possibility, let us know: we can explore the costs of a loan with you to compare.

Moving ahead with a project now versus later

Sometimes a client will not have the capital they need to invest in a project available to them now but being able to do so quickly can have a distinct upside versus investing in the same project later from a financial or practical perspective.

Ease

We are set up to lend £1 million – £10 million at pace. We can take a holistic view of lending, and although we want to see a great borrower and a great asset, we can often consider more factors than traditional lenders to support a lending application, provided the numbers add up and it’s a quality loan. Bridging can offer a smoother application process that is easier to manage and less complicated than arranging a conventional loan. In some cases, borrowers and their advisers approach us because lending quickly in the most streamlined and efficient way possible is a priority. Here, the relative ease with which it is possible to arrange bridging finance is often a real draw.