What is short term finance?
Short term finance (also known as bridging loans) is defined as a loan secured against property or land for a very short period of time and are not for every one. However they have some key features which make them beneficial for some borrowers.
Why borrowers might consider short term finance:
- They need to arrange the finance very quickly.
- Short term lenders can complete loans very quickly – its what they do
- They often have less requirements which also speeds up the process
- A traditional mortgage or loan is not available
- Maybe income isn’t high enough to support both the existing commitments and the short term loan.
- Maybe there are underlying issues with the property or borrowers circumstances which rule out a normal mortgage or loan.
Understanding the benefits of short term finance
Short term loans are generally more expensive than a standard mortgage. Therefore borrowers who take out a short term loan will have a good reason to do so. This usually involves a need to do something quickly in order to achieve something which is important to them:
- Buying something quickly undervalue where the profit in the deal is much greater than the cost of the finance.
- Completing on a business deal or on a purchase where the cost of the finance is far less than the penalty if the deal doesn’t complete on time.
- Realising a dream – maybe buying that dream home before someone else does – the loan may be a price worth paying once they know the total costs involved.
Weigh up the costs versus the benefits
Normally all costs are added on to the loan – this could include all of the interest for the proposed term plus any fees charged by lenders or brokers. For example, say someone needs to borrow £100,000 over 4 months but wants a 12 month facility just in case. With the 12 months interest and fees all added, the total loan could be in the region of £110,000.
- Before deciding if short term finance is right for you, some points to consider are:
- What are the likely losses if borrowers can’t raise the finance quickly – e.g.:
- They may need to reduce the property asking price by £30,000 for a quick sale
- They may lose a deposit of £25,000
- They may miss out on a business deal which should make £50,000 profit
- The costs of the bridging finance should be less than the losses if the finance can’t be arranged
- Compare the actual monetary cost of the bridging finance to the potential losses.
- Remember if interest has been added at the outset, the cost will be lower if the loan is settled before the end of the term
- Is there an alternative means of achieving the desired outcome