The Importance Of An Exit Strategy For Bridging Finance
As you are no doubt aware, a bridging loan is supposed to meet a short term lending requirement ideally lasting a few days, weeks or months. An important factor when a lender considers a request for such borrowing is that the client has a realistic exit strategy in place.
This exit strategy could be by way of a number of routes such as the client arranging longer term finance like a mortgage, selling the run-down property once it has been renovated or clearing the liability perhaps from monies received from an inheritance.
Without a suitable exit strategy in place it is going to prove more difficult to arrange bridging finance. If it is possible then the proposition will no doubt need to involve a very low loan to valuation (LTV) percentage and the interest rate charged may well reflect the increased risk to the lender. After all, the lender will not wish to find themselves at risk of loss.
Clients should be aware that if a problem is encountered with their bridging loan exit plan then there might be financial implications. For instance, if the bridging loan is not repaid by the agreed date then the interest rate charged may increase. This would obviously result in the cost of obtaining such finance going up and, depending upon the amount borrowed, could result in a significant additional sum of money needing to be found by the borrower.
Perhaps the worst possible outcome is that the lender feels that it is faced with no alternative other than to realise its security to liquidate the borrowing. Obviously, this would not be a satisfactory outcome from the client’s point of view.
So, when considering obtaining a bridging loan, it is important that attention is paid to the proposed exit strategy that should be a realistic and achievable one.