Bridging helps in a difficult climate

The business uses of bridging finance are numerous. Current market conditions mean that many companies are turning to short term funding as an alternative to securing the backing of cautious and uncooperative mainstream lenders, and there are some lesser known uses for bridging finance that are becoming more prominent as a result.

Cash Flow Solutions
The most prevalent of these is the employment of bridging finance as a short term cash flow solution. Businesses still need short term capital to push through projects and acquire stock or other materials; but the word at ground level is that many firms are still experiencing considerable difficulties in securing the facilities they need from their banks. A bridging loan still retains the advantages that it can be secured on any suitable property and can be completed rapidly.

Investment Property
Market conditions are giving rise to an increase in activity at property auctions. Bridging finance can be ideal for initial purchase as there are restricted timescales to obtain funds and often completion is required within 14-28 days of paying the deposit. Also the investor may wish to improve a property to then remortgage with a traditional lender. There has also been a growing trend for SMEs purchasing bargain distressed commercial property to have the opportunity of owning their own buildings. Often a short term facility can help secure the property, giving investors breathing space to put long term facilities in place.

Meeting Unexpected Costs
As has previously been the case, we are still seeing examples of companies using bridging finance to meet large or unexpected tax demands and other types of bills. Given the squeeze on working capital that many firms are undergoing the use of short-term funding to meet shortfalls when it is time to pay the bills is likely to increase. We have also seen a rise in the number of companies using bridging finance to cover an unexpected hike in the cost of an important and potentially business critical contract that is due for renewal.

Refinancing
Another less publicised application for bridging finance is a stop-gap solution for companies that want to refinance their long term lending. Given the rapidly changing economic conditions, many firms are reassessing their banking arrangements and concluding that their existing facilities may need to be restructured. Whether they decide to renegotiate with their current bank or transfer their business elsewhere, an organisation needs time to review the available options and structure out their new arrangements. It is during this period that a bridging loan can be used to give them the breathing space they require to negotiate the most favourable long term deal, and we have actually seen occasions where a bank introduces the client to a suitable broker.

Credit Repair
Related to the above is the use of bridging finance as a credit repair product. Many companies are realising that although credit conditions are beginning to ease, the banks will continue to apply exacting standards when deciding who to back, and will be scrutinising the credit profiles of potential borrowers more closely than ever before. A growing number of firms are therefore taking steps to address minor imperfections on their credit records that have resulted from the challenging conditions of recent months, thereby ensuring that they will qualify for the maximum level of support that their bank can offer. For those with some outstanding equity in their premises and a track record that is generally favourable, short term funding is proving to be a popular means of accomplishing this. By maintaining the repayments on a bridging loan an organisation demonstrates its ability to service a debt and can build up a healthy credit history before it seeks to finalise an ongoing arrangement with a mainstream lender. We’ve seen instances where banks agree a specific refinancing package on the basis that the client proves they can successfully service a short term loan, but any company that is considering using short term funding in this way needs to be absolutely clear on what their refinancing options will be.

Opportunities
As you can see, opportunities to do bridging deals can still be found in significant numbers provided that you know the type of client to target and can make the right connections to help bring deals to fruition. Brokers that are new to the field will find that most established lenders such as Lancashire Mortgage Corporation are more than happy to share their experience and provide them with any training or support that they require.

Exit Route
The exit route is the vital component of bridging finance not the initial product offering, as without the exit route being firmly established the customer and lender is likely to run into severe difficulties in the near future. The exit route mustn’t be over ambitious, a ‘may be’ or ‘hopefully’ will not suffice for the client or the broker. Equally as important is the stability and experience of the lender in dealing with bridging finance, to protect the client and the broker by drawing on their experience and considering the clients circumstances, the property, overall deal and exit strategy carefully, before making a sensible and well measured bridging finance offer.

Choosing the right lender
Brokers have expressed concerns about the announcements of bridging lenders Mathon Finance and Excel Securities, going into administration and a few months ago Link-bridging. These concerns are expected as brokers have already witnessed a traumatic demise of secured loan and mortgage lenders in the recent years. Their concerns focus on the stability of lenders, particularly new entrants and those lenders who may have been over ambitious with their products and LTVs in the past; and perhaps even now. Brokers are now seeking reassurances, for both themselves and their clients, that the lenders are stable, can honour the deal that has been offered and that the products on offer have taken into account an achievable and realistic exit route.