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Are Bridging Loans a Good Tool for Business Finance?

Published 02/02/2012 00:00:00

The number of bridging loan providers has increased sharply and published statistics suggest that there has been an increase of 27% in the number of bridging loans taken out in the past twelve months. My question: is - is this necessarily good news?

By their very nature bridging loans are more expensive and provide lower loan to value ratios; the key feature of bridging loans is of course that there has to be a clear "exit strategy" in place, in other words both the borrower and the lender need to know exactly how the bridging loan is being repaid. If the idea of the bridging loan is only to renew the bridging facility again and again then it is a pretty expensive way of arranging business finance. On the other hand, bridging loans can be very flexible and very often there are fewer underwriting hurdles to jump. So clearly there is a market for this sort of finance. Is the market expansion a function of real demand or is the explanation merely that very often bridging loans are used because the traditional business finance providers apply very restrictive underwriting criteria.

So let me make it clear that I'm not against bridging loans per se. I am just raising the point that it appears that bridging loans may be used more often than necessary where other sources of finance would be more suitable.

I'd be keen to learn of any situations where you believe that bridging loans were arranged incorrectly.

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