Closed Bridging Finance

Closed bridging finance, also known as a closed bridge loan, is a short-term lending solution designed for borrowers who need funds quickly and have a guaranteed repayment strategy in place. Unlike open bridging loans, which rely on uncertain future events for repayment, closed bridging finance is secured against a definitive and predetermined exit strategy.

The key characteristic of a closed bridge is the certainty of repayment. This exit strategy is typically tied to a fixed event, such as the sale of a specific property or the refinancing of an existing loan. The lender meticulously reviews the borrower’s exit strategy to ensure its viability and minimizes risk. Common examples include:

• Sale of a property: The borrower has already exchanged contracts on the sale of a property and needs funds to complete another transaction before the sale completes. The proceeds from the sale are earmarked for repaying the bridge loan.
• Refinancing: The borrower has an offer of a longer-term mortgage or another form of finance and needs bridging finance to cover a short period until the refinancing is finalized. The new loan will then be used to repay the bridging loan.
• Inheritance: The borrower is awaiting funds from an inheritance settlement and requires short-term capital.

Because of the higher certainty of repayment, closed bridge loans are generally considered less risky for lenders compared to open bridging loans. This often translates to more favorable terms for the borrower, such as lower interest rates and potentially higher loan-to-value (LTV) ratios. LTV represents the percentage of the property value the loan covers; a higher LTV allows borrowers to access more capital.

Benefits of Closed Bridging Finance:

• Speed: Closed bridge loans are processed quickly, often within a matter of days or weeks, allowing borrowers to seize time-sensitive opportunities.
• Certainty: The predetermined exit strategy provides both the borrower and lender with a clear path to repayment, reducing anxiety and potential complications.
• Flexibility: Although the exit strategy is fixed, closed bridging finance can be used for various purposes, including property acquisition, development, and business expansion.
• Potentially Lower Rates: The reduced risk profile can result in more competitive interest rates compared to open bridging loans.

Considerations:

• Exit Strategy is Crucial: The success of a closed bridging loan hinges entirely on the borrower’s ability to execute the predetermined exit strategy. Any delays or complications in the exit plan can lead to financial difficulties and potential foreclosure.
• Due Diligence: Lenders conduct thorough due diligence on the proposed exit strategy, scrutinizing contracts, financial statements, and market conditions to ensure its viability.
• Fees: Bridging loans typically involve arrangement fees, valuation fees, legal fees, and exit fees, which can add significantly to the overall cost. Borrowers should carefully consider these fees before committing to a loan.

In conclusion, closed bridging finance is a valuable tool for borrowers who require rapid access to capital and have a reliable repayment plan in place. However, it’s essential to carefully evaluate the exit strategy, understand the associated fees, and ensure the repayment is achievable to avoid potential financial repercussions.