Exit Strategy for Bridging Loans
An exit strategy for a bridging loan is the borrower's plan for repaying the bridging loan, typically involving the sale of a property or securing long-term financing.
Exit strategies are important for any type of financing transaction, but they are especially important when it comes to bridging loans. A bridging loan is financial borrowing in which a borrower needs immediate cash to bridge a gap in a financial transaction such as buying a home before other funds become available.
An exit strategy for a bridging loan is a plan that outlines how the borrower will pay back the loan in full prior to the loan term end.
What are the Different Exit Strategies for Bridging Loans?
Bridging loan lenders typically require that borrowers provide an exit strategy prior to approving any loan application.
The most common exit strategies include the following:
Sale of the Property
Borrowers can repay a bridging loan by selling the property they are financing. If the value of the property is sufficient to pay off the loan, then the sale is a viable exit strategy.
Refinancing
When taking out a bridging loan, borrowers should consider refinancing the loan and converting it into a more permanent form of financing such as a mortgage. Refinancing a bridging loan enables borrowers to keep the property while taking advantage of more advantageous terms relative to the original loan.
Equity Investment
A third exit strategy involves raising capital through an equity investment. Borrowers can seek out an investor to provide the funds for repayment of the loan.
Money or Asset Repayment
Borrowers can also look to alternative sources of cash to repay a bridging loan, such as savings accounts, cashing out an annuity, or liquidating any assets that can be used to pay off the loan.
What are the Benefits of an Exit Strategy for Bridging Loans?
Having an exit strategy for a bridging loan is essential in helping to prevent any unexpected financial difficulty. Without an exit strategy, borrowers may be unable to pay off the loan and default on the debt.
An exit strategy helps borrowers plan ahead so that they can ensure a swift and successful repayment of the loan.
Additionally, having an exit strategy in place can help lenders determine a borrower’s creditworthiness. An exit strategy demonstrates to lenders that the borrower has thought ahead and has a realistic plan for how they will repay the loan. This can help demonstrate the borrower’s commitment to repayment which may improve their chances of getting a loan approved.
Finally, having an exit strategy can help borrowers is an important element to securing a bridging loan as lenders require the borrower presents an acceptable exit strategy.
Final thoughts
Having an exit strategy in place for any kind of financing transaction, especially bridging loans, is essential for both borrowers and lenders. An exit strategy ensures that the loan can be repaid in full and on time, can help demonstrate to lenders that the borrower is creditworthy and is committed to repayment, and can help reduce the borrower’s overall borrowing costs.
