For those who do not know, a bridging loan is an alternative form of business financing that makes it easy for you to raise short-term cash quickly, and without having to jump through the holes as you would with traditional loans.
For example, if your business is facing difficult times, you can use a bridging loan to run your business for a period of time, while exploring other long-term financial options. This loan will be provided against the value of your company’s hard assets, giving you the opportunity to meet your business obligations and get your business back on its feet.
In the past few years, this form of loan system has become so popular with business investors, especially those in the property industry. In fact, records show that bridging loans grew by as much as 38% between 2011 and 2017 , making it one of the fastest growing sectors in UK’s finance industry.
However, that bridging loans are not as difficult as traditional loans does not mean there are no pitfalls, and if you are not careful, you could end up putting your business in a difficult situation.
To help you avoid potential bridging loan problems, here are a few mistakes you should avoid making.
Ignoring the interest rate
In every financing situation, the interest rate plays a very vital role. This is what determines how expensive or cheap a loan is, and will decide how much you will pay up eventually.
That you have a time-based business opportunity and in a hurry is no reason to ignore the interest rate for a loan deal offered. If you sign up for a loan with an incredibly high interest rate, you may find that you are unable to meet your repayment obligations, and when this happens, you stand the risk of losing the hard asset you placed as security against the loan.
To avoid this type of situation, ensure that you are clear on all the terms of the loan deal, and ask the loan provider to explain the available interest rates , and how much you are expected to repay.
Paying too much attention to the interest rate
You may think this is contradicting the first point, but that isn’t the case.
When you focus too much on the interest rate, you can make the mistake of going with the cheapest deal. While this is not exactly a bad thing, you should know that there are other factors that affect the cost of bridging finance. In some cases, some lenders spread out the interest in a number of extra fees that you will not know about until you have signed the dotted line.
Thankfully, there are number of trustworthy instant bridging loan companies such as Hank Zahris.com who states “The key is to strike the right balance between how much you are willing to pay, and how much you can pay.”
No exit strategy
A bridging loan is meant to be a short-term solution to your financial problem. This means that you must have a long-term plan that will not only resolve your financial situation, but also help you repay your loan. For example, if you are getting a bridging loan to buy another home before it goes out of the market, your exit strategy should be to sell your current home and pay off your debt.
Because bridge finance is short-term, you have very little time to pay back, so make sure you know where the money is coming from, and be certain that it is, before getting a bridge loan.
Applying for a bridging loan when you don’t need one
Most people think that because a bridging loan is easier than traditional loan and mortgages, it is alright to just apply for one.
It is never a good idea to get into a debt you are not ready for, so if you don’t have a good reason for getting a loan, it is not a good reason to get a loan.
Before starting the loan process, be sure that you actually need the money for a venture that will bring in returns, and that you can pay back before the expiration of your loan term.
Because a bridging loan carries a higher level of risk than regular loans, it has a higher interest rate. For this reason, be sure you can meet your repayment obligations before getting a bridge loan, otherwise you may put your entire business at risk.
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