How to choose the right Bridging Lender for Larger Loans
Bridging loans are typically used when purchasing a property whereby there is a requirement of high amounts of cash for a short time frame. They are available for both personal and commercial customers and range from £10,000 to £250 million+.
Lenders decide which mortgage bridging loan rate to hand out on a case-by-case basis but tend to reserve the most lucrative rates for borrowers with:
- A clear, strong exit strategy
- Clean credit history
- A substantial security property
- Previous experience in property
- A good deposit
As the bridging loan market continues its steady growth with an ever increasing range of lenders,
Senior Solicitor Rowan Gibney explains why it’s essential you choose the right lender for your larger loans.
Spotting the opportunities
You should consider what the bridging lender requires as security for their loan (i.e a legal charge over a property or assets of your business), what interest rate they offer and any potential penalties for early repayment. You should also consider any potential upfront fees for the transaction to commence. Often you will be required to provide a cost undertaking to the solicitor acting for the lender, you will therefore need to pay this sum on account to the solicitor acting for you.
Stages of the Transaction
Each lender will have their own requirements/ due diligence processes but in general the transaction with a bridging lender can be summarised as follows:
- The Lender provides the loan term/ decision in principle, this will outline the amount of loan offered, the term of the loan, the interest rate and the security required for the loan.
- Once you accept the terms provided by the lender, a valuer and solicitor will be instructed by the lender to act on their behalf. At this stage you will also need to instruct a solicitor who will act for you and liaise with the solicitor acting for the lender.
- The solicitor for the lender will contact the solicitor acting for you and will request any required documents in order to commence legal due diligence process, often this will involve title documents being provided for any property being taken as security together with details of any parties (whether corporate or individual) who are providing guarantees for the loan.
- While the legal due diligence process is ongoing, the valuer will provide their report to the lender which will confirm the market value of any property being offered as security. Be aware that if the valuation report figures are less than what the lender expected, the terms of the loan will likely change.
- Once title documents have been received (in the event that property is being taken as security), the lender’s solicitor will issue the lender’s suite of security documents to the borrower’s solicitor to allow for the same to be executed. At this point you will be called to attend with your solicitor to receive advice on the documents and to sign.
- Once the executed documents are returned and the legal due diligence process has completed, the lenders solicitor will then be in a position to report to the lender and the loan can be drawn.
Funding Models and Constraints
In terms of funding models, the type of bridging loan you wish to go for or which may be offered to you will depend on the interest rate you are willing to pay and your exit strategy. There are two principle types of bridging loans available, a ‘closed bridge’ loan is a loan where the borrower and the lender have agreed, prior to drawdown of the loan, a set timeframe as to when the loan is to be repaid. The borrower and the lender will also have discussed and agreed an exit strategy. Most lenders will require that the borrower provides a detailed exit strategy to confirm whether or not such a strategy is feasible/ realistic.
An ‘open bridge’ loan does not have a set timescale for loan repayment or a detailed exit strategy. However, given the increased risks such loans may present for the lender, it is likely that interest rates will be higher for such loans.
In terms of constraints, for any lender, the key criteria they will consider is the value of the assets which you can provide for security for the loan. You should also be aware that while bridging lenders are more likely to take a risk with a potential borrower compared to established mainstream lenders, there is still an extensive due diligence process carried out before any funds can be released.
Securing Loans against more than one Asset / Portfolio of Assets
Often a lender may require that multiple assets are provided as security for the loan. Generally, larger loans will require more extensive security depending on the value of the assets you can offer.
How important are speed and efficiency in this process?
You should be aware that some lenders will have a time limit on how long their terms are valid for. It is therefore in the best interests of the borrower to provide all necessary documents as soon as possible.
While much will depend on the legal due diligence and the valuation report findings, borrowers can assist to speed up the process by being proactive in furnishing required information to the lender or to their solicitor, in good time. For example if the borrower is agreeable to providing security over a property, from the outset they should consider where the title information is located etc. well in advance of instructing their solicitor.
Economic uncertainty; Solutions & Advice to clients
The recent increase in the Bank of England base rate to 1.75% will have a knock of effect on the interest payable by prospective borrowers. You should consider various different lenders in order to compare proposed rates to ensure that any loan is affordable for you/ your business now and in the future.
A clear Exit Strategy & it’s Impact
As noted previously, your exit strategy and the importance attributed to same will depend on the type of bridging loan you are going for. For a closed bridge loan the lender will expect to see a clear exit proposal which must be realistic. Quite often the exit strategy is either through the sale of property/ assets or refinance with a mainstream lender.
Steering clients through the Process
The best advice is to maintain good communication with your solicitor and the lender throughout the process. Your solicitor will often need to refer to you for instruction in order complete the legal due diligence required by the lender, responding to any such requests quickly and comprehensively will greatly assist the process.
Be prepared that the lender may change/ amend their proposed loan terms during the due diligence process as result of for example, any valuation report received on the assets to be taken as security. Your solicitors, broker or indeed the lender themselves will provide you with an amended term sheet should there be any change to the original proposal.
You should be prepared to deal with a large volume of documents, in particular when it comes to signing the security documents. Your solicitor will provide you with advice on the documents in advance and you should raise any queries you have prior to signing.
Get in Touch
Our team acts for a variety of banks and institutional lenders and borrowers in relation to all kinds of financing arrangements that may be required by businesses.
If you require legal advice on a Bridging Finance or any Commercial Loan matter in Northern Ireland, contact Rowan and our expert Commercial Lending Team on 028 9022 7949 or make an email enquiry.