Short Term Sources Of Finance
Many people who require short term sources of finance own a property and sometimes more than one. This can help with cross-collateralization loans. Sometimes the property is unencumbered; at other times there is a medium loan to value first charge mortgage outstanding. If this is the case a second charge may be appropriate. If you have a property with no outstanding debt, we can use a first charge lender.
Short term finance is ideal for securing other assets. Your business may need short term finance to shore it up, but you may lack sufficient equity in your business. You may need to take advantage of a limited-time opportunity but have no cash on hand. Whether you want to buy a property or take advantage of a business opportunity, short term finance is useful.
If you have a property that a lender can raise funding against, short term finance is perfect for you. Usually, you won’t need to disclose your income and lenders can offer a maximum term of up to 24 months. You will, however, have to have an exit strategy in place for paying off the loan.
Short term finance is useful for many scenarios. Some of the most common include:
- Bridging. Often, buying one property depends on releasing capital from a different property. If the purchase has to proceed before its linked sale is complete, temporary finance bridges the gap.
- Funding renovation or construction work. High street lenders usually require properties to meet a specific standard before agreeing to long-term finance. If a property doesn’t meet those conditions, short term finance is an ideal solution. It can fund the necessary work so those conditions are met.
- Unforeseen liabilities and costs. Sometimes, issues arise with a property development project that means the budget is no longer enough to complete the project. Short term finance can give the extra cash injection needed.
Using Personal Funds
One option for short term financing is to use personal funds. Property developers who have personal savings can use them to meet their business’s immediate needs. If funds are accessible, this can appear to be an obvious and simple way to resolve the issue. It also avoids any need to use external funding sources.
For property development investors who have a limited company, however, the process isn’t simple. They need to treat the transfer appropriately for the purpose of taxation. That means formalising the transaction. Borrowing money from a tax-efficient investment vehicle like an ISA or pension is often problematic. It often means losing the tax benefits built up over time.
If you are a high net worth individual with the desire to develop properties, short term finance is also a great way to cover initial costs such as planning permission or contractors, or even labourers. It gives you the flexibility to take advantage of projects which may also be time-sensitive, such as auctioned properties and development projects requiring a fast turnaround time.
Taking Out A Business Loan
If a property development professional requires extra finance, they may turn to their bank for a business loan. This often seems like a convenient and simple option. Nevertheless, many professionals find their bank lets them down. Traditional lenders usually process loan applications very slowly.
Prospective borrowers may then miss out on opportunities, especially if time is of the essence. Banks have rigorous due diligence and eligibility checks to carry out. Even when they agree to a loan, the process is usually very drawn out. That makes using a traditional lender inconvenient if you require speedy short term finance.
Using An Overdraft Or Credit Card
If developers only require a small sum of money in the short term, they may use their overdraft or credit card. To use this option, though, borrowers must have confidence in their ability to repay quickly.
Failing to repay this debt rapidly can result in a lot of interest. That makes this type of short term finance more costly than alternative options.
Often, those with an interest in property development or a business that needs a hole to be filled will find themselves needing funds in a hurry. If a promising property arises, it’s helpful to have access to rapid short term funding to take advantage of it.
There are several short term sources of finance for property development projects. Here, we’ll look more closely at the different options open to investors and property developers so you can be well-informed.
The above options may suit your needs as a property developer, but in many cases they won’t suffice. Using your own personal funding sources are often a poor idea for business purposes. Finding alternative cost-effective short term finance options is therefore essential.
Fortunately, there are solutions that can suit your needs. Bridging loans and development finance are speedy and convenient solutions for those involved in property development projects. Lenders can approve loans and release the money in as little as three days. That means getting a project off the ground speedily is a breeze.
It also allows developers to take advantage of immediate opportunities without fear of missing out. Below, we take a closer look at these short term solutions and what they involve.
Borrowers who have a mortgage already in place have a couple of options.
Firstly, they may seek to extend the amount they can borrow under the existing loan by remortgaging. That can sometimes be impractical, though. Sometimes, prospective borrowers’ are now in different circumstances from those when they made their first application. That could lead to failure of the affordability test.
Alternatively, rearranging a current loan could result in a higher interest rate across the whole loan period. It could also result in a high early repayment penalty.
The second option is to consider taking out a second charge bridging loan. Second charge finance is an excellent alternative to remortgaging. It involves taking out another loan from another lender to sit on top of the existing mortgage. This type of short term finance is particularly good for buy-to-let landlords. Second charge loans release some equity from current rental investment properties to fund the renovation or purchase of another property.
Often, high street lenders fail to understand property professionals’ needs. That makes obtaining essential funds from traditional lenders difficult and time-consuming. Development finance often represents a more convenient and flexible alternative.
It’s suitable for new build projects. Thanks to the personalised and tailored approach of development finance, borrowers find it easier to meet their requirements.
We advise on Developer Exit Finance for new build property developers that have hit or about to hit practical completion.
Bridging loans give buyers a stop-gap financing option to fund purchases. This interest-only, short term lending product is suitable for use for many different types of property development project. Bridging loans provide useful cash injections to cover unexpected costly problems outside the budget that arise. They are also ideal for paying auction deposits.
Bridging loans have a cut-off point for repaying the loan. However there isn’t a penalty if you repay the loan early. A Bridging loan is flexible and can meet a borrower’s precise needs.