The way bridging loans work means you need a bulletproof exit strategy. Here’s what all businesses must be aware of when building an exit strategy for their bridging loans.
All loans come to an end, and how you terminate your loan is your exit strategy. With standard business loans, your exit strategy is likely little more than making your regular monthly repayments until the end of your term. The way bridging loans work means you need a bulletproof exit strategy.
In 2024, the value of the UK bridging finance market soared, with an annual market increase of 27.9%, indicating the exploding demand for quick approval on flexible loans. But without a viable exit strategy, you are putting your assets at risk.
Here’s what all businesses must be aware of when building an exit strategy for their bridging loans.
What is an exit strategy for a bridging loan?
Your exit strategy is the plan you have for repaying your bridging loan. Since you don’t make regular monthly repayments on these loans, the loan principal plus interest is paid back in a single lump sum at the end of your term.
Exit strategies must be specific and viable, as lenders will underwrite your loan based on how realistic your stated exit plans are. It’s even more important if you plan to roll up your interest repayments and pay them back at the end of the term.
Why the right bridging loan exit strategy is important for your business
Bridging loan exit strategies are required to repay your loan and avoid going into default successfully. If your account defaults, your lender will have the right to charge late repayment penalties and take the asset you put up as security in the first place.
In short, the cost of a poorly formulated exit strategy could impact your organisation for years to come, or even put it into financial distress it cannot come back from.
So, what are your options if your exit strategy fails?
If your exit strategy cannot be executed at all and you are out of options, expect your collateral to be repossessed. Moreover, you will find a black mark on your credit history, complicating future business borrowing.
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Will my exit strategy impact the loan I’m approved for?
Businesses must be aware of the importance of the exit strategy to any application. Your strategy directly correlates with how much you can borrow and your likelihood of seeing your application approved.
The lender’s primary focus is getting their money back plus interest. Anything outside of that is secondary. With that in mind, it’s easy to see why your exit strategy is crucial to a successful loan application.
Common bridging loan exit strategies
Every business is unique, meaning each exit strategy will be unique. Your lender doesn’t care what your exit strategy is, only that it’s feasible and they have a high chance of getting their money back.
Here are the most common exit strategies used by UK firms.
Security property sale
Selling the property you use as security on your loan is the most popular exit strategy businesses use. In some cases, your lender may require the property to be listed for sale before approving the loan. If you are refurbishing or renovating before the sale, this requirement may be waived entirely.
Selling other investments
Sometimes, you may wish to retain the security property and instead decide to sell other investments. Other investments forming part of your exit strategy must be valued and have a reasonable amount of liquidity.
For example, you may choose to sell a piece of land that has already been listed on the market or another property on your books.
Refinancing into a mortgage
Bridging loans may be refinanced into a different type of loan. If property is involved, this usually takes the form of a mortgage. Again, you must prove to your bridging loan provider that the chances of this happening are realistic.
For example, you may decide to show that your new application would meet the mortgage lender’s existing criteria. Alternatively, you may have already obtained an agreement in principle.
Selling a secondary property
Finally, businesses may decide to sell a secondary property. In this context, secondary property is an asset not used as collateral. Despite how straightforward this exit strategy sounds, it’s a more complex exit plan than you might think.
Remember, your lender won’t have any form of charge on this secondary property. Although no lender goes into a bridging finance agreement with the intent to repossess, attempting to repossess an unrelated property creates massive headaches for lenders if things go wrong.
It’s not uncommon for UK bridging loan providers to demand a formal charge over a property being used for your exit strategy. If you’re unwilling to agree to this, you may be forced into agreeing to other terms, such as:
Some lenders may take a more relaxed approach to this exit strategy by allowing you to manage the sale yourself, but this isn’t something you should expect as standard.
How to plan a bridging loan exit strategy
Assess your exit strategy and how it aligns with your organisation’s goals. There is little point in taking out a bridging loan for two years if you believe it will take three years to develop and sell a property on the open market. Understanding the ins and outs of your project comes down to enlisting experts who can objectively assess your plans.
Ask questions related to your plan. For example, suppose you are purchasing a derelict property and renovating it into apartments. Great questions to ask include:
Businesses rarely settle on a single exit strategy and attempt to fit a square into a circle. Instead, they explore different exit strategies. Having a viable Plan A and Plan B at your disposal always impresses prospective lenders and secures the future of your project.
Any exit strategy will be evaluated based on its feasibility. That’s why businesses are strongly advised to build contingencies if they encounter unexpected challenges. If you believe you will need two years to execute your exit plan, take out a three-year bridging loan with an early repayment option to cover yourself instead of a two-year or 30-month loan.
At Hilton Smythe, we boast a vast network of bridging loan providers supporting UK businesses in achieving their growth targets. If you need a team of financial experts who can help source the best bridging loan for your business, speak to the team now.