Business Moneyfacts – July 2012
Bridging Finance Supplement – Laurence Goodman
The Benefits of Using an Experienced Bridging Lender
Bridging finance has increasingly established itself as an essential player in the property financing product arena. Whilst bridging is a niche product, and relatively small in UK Loan Book size compared to Residential and Commercial term mortgage books, it fills an essential front end project financing gap necessary to facilitate either an ongoing property sale or long term financing remortgage. Often, without the bridging loan a property opportunity would be lost!
However, advisers should always give due consideration to the experience and reputation of this very niche lending partner, to ensure that not only is the most appropriate structure and terms being offered to their client, but also that this is backed up with top notch service support and processes.
However, there is one more vitally significant facet that needs to be identified when approaching a bridging lender; commercial and business experience. Over 95% of Bridging Finance requirements are business loans and not regulated home loans, and therefore bridging must be recognised by lenders, intermediaries and borrowers alike, that it is a product much more aligned to commercial business banking than the processes and systems adopted within the regulated mortgage lending arena.
Experienced, quality lenders will be able to demonstrate a high degree of commercial and business banking ability across their whole team, from business development and sales to underwriting and processing. Underwriters and credit decision makers must be able to engineer and properly structure a viable proposal that suits all parties. Bridging lending can not be effectively carried out by credit score or a tick box application processes. Every loan application needs to be underwritten and assessed, by commercially experienced underwriters, on their own merit, supported by detailed property and borrower financial information.
There are a multitude of circumstances where bridging loans are required, which goes hand in hand with the fact there are likely to be a number of funding structures and options available to applicants to best fit their circumstances. Business based financial engineering experience is required by the lender to be able to deliver an effective and appropriate offering to the applicant.
There are numerous pressure points to be considered when processing and underwriting bridging loan applications. Obviously the valuation of the property security requires detailed experienced consideration, along with the viability of the exit proposal, the applicant’s profile in terms of credit rating and earnings, the experience of the applicant to deliver the exit proposal as proposed within specific timeframes, and the marketability of the underlying security. If any of these points can’t be met to the satisfaction of a quality experienced bridging lenders underwriting team, an experienced lender would not proceed; the risks would be assessed as being unacceptable.
Bridging lenders provide the “front end” and speculative aspect of a property project or transaction and are therefore wholly assessing risk, and consequently pricing risk. This risk / reward equation by the very nature of this product, places bridging lending at the highest risk point in the property finance sector.
In the current climate, the majority of loans are being advanced to high net worth, full financial status borrowers and not to non status or credit impaired sub prime applicants, where many applicants are likely to have existing property portfolios which they wish to expand or may have a requirement for a bridging loan which is directly connected to a commercial or business situation. These borrowers therefore demand a high level of commercial and business banking acumen from an experienced lender.
In many respects, given the nature of a bridging loan proposal, the structure of the deal and the security being taken by the lender, legal Due Diligence is more often than not likely to throw up issues which will require opinion and detailed consideration by the lender. As such only experienced bridging lenders would have the skill base to consider and analyse such complex issues. It would be extremely naïve for a lender to solely rely on legal advice from their solicitors, as many matters can arise in which the lender and not their advisor, would need to take a commercial and pragmatic view on a situation. In some cases an experienced bridging lender may reject a proposal during the legal due diligence stage if issues can not be resolved, whereas some less experienced lenders might take on a higher and undesirable level of risk on complex cases if they don’t have sufficient knowledge or experience; this of course would not only be to the detriment of the lender but also probably to the borrower!
By the very nature of bridging lending, often complex commercial considerations are involved, assessments of risk and security need to be deliberated and commercial views may need to be taken, so it is therefore wholly inappropriate for one firm of solicitors to be acting for both the borrower and the lender. Borrowers must have direct access to their own independent legal advice, and be made properly and fully aware as to what they are legally entering into. The proposal may be complex, with additional securities and personal guarantees being provided, and certainly can not be regarded as being similar in process or risk to taking out a mortgage on your home. This independent advice may add cost to the bridging loan, but such costs should always be considered as part of the overall property project costs alongside the total bridging loan costs. The total bridging loan costs and fees can not be compared with the costs or annual interest rate charges of long term finance loans; they are totally different products serving totally different purposes.
Experienced bridging lenders will always insist on this independent advice being taken by the borrower; dual representation is both naïve and fraught with risks to both lender and borrower.
A further benefit of using established experienced lenders is that they will proactively work alongside introducers to ensure deals complete. Many introducers are extremely busy dealing with high volumes of lending proposals, and need to rely on a pro-active lending approach from lenders. It is therefore important that introducers have confidence in the lender secure in the knowledge that their proposal will be considered and processed properly, even if there are complex circumstances; and that the lender will have the ability and awareness to come up with an appropriate solution for their client.
Lenders with a flexible product range and lending focus are likely to offer much more of a rounded and whole of market financing solution than constricted lenders who can only consider “vanilla deals”, in one scenario, in certain regions or postcodes.
In conclusion, whilst some bridging loans are indeed straight forward, these are few and far between, and do not represent the norm in the sector. Regulated lending accounts for less than 5% of the total market; and whilst single unit residential investment buy to let property loans may be more straightforward, there will always be specific aspects to a proposal which will require an experienced level of input. Therefore applicants and introducers should direct their bridging enquiries to established and experienced whole of market bridging lenders, by which we mean the whole of the UK, who consider all property types, residential and commercial and all circumstances.
Experienced lenders welcome regulation and are not afraid to do regulated business as and when required, but Introducers must align themselves with an experienced and established lender that they can trust and build up good communication channels with, in order to get deals done.