Bridging finance solutions have been a common go-to for business owners that are looking for quick resolutions. Essentially, bridging finance options can help ‘bridge the gap’ in transactions which are time-constrained and require large funds. This is one of the reasons why bridging finance has become such an appealing proposition for business owners.
Whilst it can be beneficial, as with any form of lending there can be risks involved with taking out a form of bridging finance. This article helps to outline the risks involved with bridging finance and how you can manage these risks to protect yourself against them.
Arrears occur from mispayments
This tends to be a common risk for most if not all loans. If you’re having trouble being able to pay back the loan, there can be strong consequences for repayment failure. This can be particularly risky in regards to bridging loans and finance options as the interest rates tend to be relatively high. This is because they’re a form of short-term finance.
Assets that are relevant to the bridging finance can also be used in collateral if payments are unable to be managed. This means that users of bridging finance can lose out on more than just money when taking out the loan.
Defaulting on the loan
It’s common knowledge that defaulting on a loan will come with major consequences. By ‘defaulting’ on a loan, this means you were unable to adhere to the terms and have been unable to pay back what you owe. As a result of this, you’ll be putting major assets that you hold at risk.
There are several options that lenders have to discover alternatives of how you can pay back the loan. This can include county court judgements, demand letters or even liquidating your business altogether. At this point, you can be rather helpless in what you can keep hold of as you’d be legally obliged to pay back the loan.
Failure With Your Exit Strategy
An exit strategy is the plan that you put in place to help you pay back your loan when you’re required to. The purpose of bridging loans is to cover the gap between two points of a purchase. Therefore, creating an exit strategy is an important part of the process.
The difficulty for bridging lenders with this if where the loan is being used for, the deal falls through or there has been an external factor that has prevented the gaps from joining. There can be external factors out of your control which influence the exit strategy also. Whether the exit strategy is possible could be dependent on the housing market, for example, if you’re needing to sell a house as a form of repayment.
With an exit strategy, the most important aspect is considering any possible situation that can arise and adapt to any possibilities.
Breach of Terms
One aspect of bridging finance that is definitely worth noting is that they’re currently not regulated. This means lenders of bridging finance can insert their own terms and conditions for what you loan. Be sure to read the fine print before signing any documents. Review terms related to fees, repayment structure, charges and the length of the term.
This is important in making sure that you don’t breach the terms of the loan and break the conditions.
Fine Print
Nobody likes surprises when the surprises come with high risk. Bridging loans can be relatively quick and easy to obtain which means people will get them in a frantic manner. This causes them to go through the process as quickly as possible without checking the finer details. To prevent such occurrence, be sure to seek legal advice and read through the document as thoroughly as possible so you understand them.
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