Bridging loans can be secured on property that is in a bad condition in order to raise the funds required to renovate the property. Property that is in a poor state of repair is often unsuitable as security for commercial mortgages, buy to let mortgages and residential mortgages. Once the renovation work is complete the property can be sold and the bridging loan repaid from the proceeds of the sale. Alternatively following the completion of the work the value of the property should have increased and should now be acceptable security to the more traditional lenders. Therefore the bridging loan can be repaid through refinancing and the property can be lived in or rented out.

Property being purchased at auction is often funded through the use of bridging loans. Having had a bid accepted at auction a deposit needs to be paid immediately and the rest of the funds to complete the purchase at the agreed bid price usually needs to be paid within 28 days. Bridging loans are popular for auction purchases because they can be arranged quickly. Having purchased the property the customer may choose to raise a long-term finance facility secured on the property such as a residential mortgage if they intend to live there, or a buy to let mortgage if they intend to rent it out. Alternatively they may sell the property to return a quick profit. The bridging loan used to help fund the purchase of the property would therefore be repaid from the proceeds from sale of the property or from the proceeds raised by refinancing property with a long-term finance facility.

An alternative exit strategy may be to take out a buy to let mortgage and rent the property. The buy to let mortgage is a long-term finance facility and would repay the bridging loan and interest payments for the buy to let mortgage would be paid from rental income.

For example a bridging loan was taken out in order to purchase a new property before an existing property was sold. This may have been necessary in order to secure the purchase of the new property because the customer felt that if they waited until they sold the existing property they may have lost their dream new home to someone else. By using a bridging loan a cell chain is made easier because the customer can buy their new property without any restrictions caused by selling their existing property. Once they find a buyer for the existing property they will be able to repay their bridging loan. Without the bridging loan the new property may have been lost, or the customer may have had to reduce the price of their existing property to sell it in a shorter timescale. Since the purchase of the new property has been secured, they can wait to sell the property for a fair price.

However each month that they have the bridging loan is costing interests and this should be considered, in addition to the costs in setting up the bridging facility. For this type of bridging loan the exit strategy is the sale of the existing property.

Before entering in to any bridging finance it is important to make sure that there is a suitable exit strategy. An exit strategy is how bridging loan is going to be repaid. Typical exit strategies would include:

Repaying a bridging loan following the sale of a property

Replacing a bridging loan with a long term finance facility

Most bridging loans can be arranged for periods of just one day to 12 months. Interest is charged on a monthly basis and this can be paid by the customer each month, or there are facilities with many bridging loans to roll up the interest so that it is all paid when the loan is cleared.

Rates of interest for a bridging finance facility are usually charged monthly, and these rates can be quite high. Therefore bridging finance is not intended as a long-term source of finance as this would prove to be very expensive. However, over the short term when set up costs and early redemption costs and penalties are taking into consideration, bridging loans can be a lot less costly than other forms of finance when money is required for only a short period of time.

The reason why bridging loans are useful and popular, is because they fill a gap in the market. They can be can be arranged quickly, they can be secured against property that is in bad condition, one bridging loan can be secured against one or more properties, the lending criteria can be more flexible than other forms of lending and bridging loans can be the cheapest way to borrow money over a short-term.

Bridging loans are short term finance facilities that are used to bridge gaps until alternative funds are available. This could either be through the sale of property or assets, money from savings or investments, or being raised through other long term forms of finance.

Businesses often use commercial bridging loans to provide fast cash injections into their business in order to fund large orders or pay bills and their payroll if a large customer is late paying their invoice. Commercial bridging loans are also often used to snap up a bargain or pay for renovation work to commercial buildings.