Commercial bridging loans are a generally accepted type of financing, given their availability for dire situations like cash flow gaps or property purchases. Although these loans are highly flexible and can be arranged quickly, borrowers need to understand the accompanying risks or else suffer severe consequences.
In the context of the UK, ignoring the consequences of a commercial bridging loan can cost a lot of money and have undesirable outcomes.
Key Risks and Considerations
1. More Expenses Lending Factors
These bridging loans have uniquely high expenses when compared to other commercial loans. The following details further elaborate on these discrepancies:
Marginal utility from these loans is significantly lower than traditional options available in the UK Market:
Always do a cost-benefit analysis before taking a loan in the UK. For example, take quotations from multiple lenders to compare and assess the difference in fees with each lender.
2. Length of Payback Period
Bridging loans are inherently short-term loans.
- Repayment plans average between 3-12 months.
- Repayment past the provided time frame will subject the borrower to penalties or loss of the asset pledged as collateral.
Tip:
Only consider applying for a bridging loan if you plan on refinancing or selling the property, as these should be part of your preset planned exit strategies.
3. Risk of Property Loss
Secured loans come with a more defined risk than unsecured loans: not paying debt on time can have major consequences.
- The lender can retrieve the property or other asset pledged as collateral.
- A business premises, for example, along with other important valued assets, can be lost as well.
Tip:
Be truthful with yourself about meeting deadlines.
4. Rate Fluctuations
Bridging loans, for instance, frequently circulate in the realm of property dealings where conditions are far from stable.
- Your ability to sell or refinance a property might be impacted by a sudden decrease in property value.
- Your planned repayment may be delayed due to changes in the market that would affect your intended business strategy.
Tip:
Always consider UK market forecasts before getting into any agreements, and consult a financial expert.
5. Borrower’s Trustworthiness and Openness
Not every lender in the UK has the same level of business ethics and honesty.
- Some might charge unexpected additional costs or give loosely defined contracts.
- Others may lack appropriate governing policies, putting you at greater risk.
Tip:
Verify the reputation of the lender alongside their set conditions and check if they have a history of providing funds responsibly.
Conclusion
Commercial bridging loans are a strong business financial instrument that can provide much-needed quick, short-term finance for companies. They do, however, have serious pitfalls that cannot be ignored. High charges, tight repayment periods, security over assets, and market volatility have the potential to transform an advantageous loan into a costly financial liability if not controlled correctly.
Before going ahead, make sure that you comprehend the terms, possess a clear exit plan, and are sure that you can honor repayment. By making cautious assessments of risks and conducting due diligence, you will be able to utilise commercial bridging loans judiciously, without getting into financial difficulty.
