Short-Term Lending

Bridging has evolved from a simple quick fix to help Mr and Mrs buy one house before selling another to what is now another source of short to medium-term finance (short-term lending), available to call upon when the High Street banks are not willing to lend. This quick-fix has evolved to satisfy the needs of the property industry and business community with short-term bridging loans, development finance, terms loans and overdrafts. Not quite all things to all men, but almost.

Whilst residential bridging loans to homeowners still accounts for approximately one-third of all loans, it is wildly competitive and only service, pricing and scale separate the various lenders. Now it is even common for borrowers to find their loan on the internet without a broker being involved. Clearly, in the future, it will be the other two-thirds of loans where the fun (and profit) can be found for intermediaries and this is where I will focus this article.

Business Overdraft

We have developed the Alternative Overdraft, which combines conventional bridging with the flexibility of a bank overdraft. Covering loans from £250,000 to £2M it is best secured by under-utilised assets such as a second charge on a private dwelling, a first or second charge on residential or commercial investments or for the business community, owner-occupied commercial properties. It is ideal for property traders and the business community, providing working capital or used to top-up other loans.

As for a conventional overdraft, an agreed limit is set, usually up to 65% of the asset value, against which the borrower can draw down as little or as much as needed, repay or reduce the facility and then draw again time and time again. It is cost-efficient with interest only paid on the balance outstanding and a small non-utilisation fee on the unused portion. Importantly it is immediately available during its two-year term and avoids repetitive setting up cost each time funds are needed – literally liquidity on tap. At the end of the two years, we are willing to consider extending the term.

Commercial property

Loans against commercial property assets tend to be larger than those secured by owner-occupied homes and need careful attention to detail to ensure underwriting is smooth, simple and quick. This is achieved by identifying and communicating the fundamentals at outset. Is the property vacant, owner-occupied or let to tenants? If it is vacant, what is the strategy for its future use and how will interest be serviced? If it is tenanted, you need to provide detailed information on each tenancy.

Interest payments for commercial bridging loans can be from retention, which will reduce the capital available to the borrower, or by monthly servicing if the borrower can show this can be comfortably met from their own resources, allowing more of the loan to be available for business use. Often there are circumstances where the rental income of an investment or the profit from the business has not yet been fully achieved and retained interest will be the solution for an initial period.

Just as term loans are required for AST investments, there is also a demand for 3 – 5 year interest only loans against commercial properties and other residential investments which is being met by some bridging loan lenders. Often this is to support business expansion or recovery and in each instance, it is necessary to prove debt service can be met. This will be difficult where lenders have a formulaic process but there are ways to structure a suitable arrangement if the lender is prepared to listen and understand the proposed strategy whereby interest retention is applied at the beginning of the loan or as a standby in a case of need.

Development finance

Residential development finance is now becoming as much part of the short-term lenders’ armoury as bridging loans, but sadly not all of the lenders new to these arrangements have the ability to efficiently underwrite the loan or to demonstrate adequate asset management after the loan is drawn down.

In the drawdown process, there will be numerous “issues” to resolve. First, review all the requirements of the planning permission and secondly if the pre-commencement conditions have been satisfied? Often the answer is they have not, and it is then that an experienced lender can decide to allow this to occur as a condition subsequent. Also, is there a right of light issue or party wall agreement to enter into? All of this needs careful consideration and constructive thought by a well-versed lender if an unnecessary delay is to be avoided.

We cannot remember any prospective borrower asking us about our drawdown process for stage advances as construction proceeds – they should! We are aware of how urgent it is for developers to pay the contractor or sub-contractors on time and we ensure our asset management team stays in close contact with the developer’s professionals so that valuation certificates can be met promptly without fuss and bother. Not every lender does this and delay in payments causes ill will on site and often causes the programme to stop.

Bridging finance, more properly named short-term lending, will continue to evolve. Not only will there be new players but also new products and adaptation of existing arrangements. Not all of the existing arrangements are simple and the likelihood is that as time goes by, to meet new challenges, they will become more complex.  However, this will offer new opportunities for those introducers who stay at the forefront of the industry.

Click here to read the article in the December issue of Bridging Introducer.