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What is a bridging loan and how much do they cost?

What is a bridging loan and how much do they cost?

By Gary Hemming, ABC Finance 

What is a bridging loan?

Bridging loans, also known as bridging finance is a type of loan which is secured against property, much like a mortgage.

The key difference is that bridging loans are usually designed to cover a short-term need, whereas mortgages are longer term.

Due to a simplified application process, bridging loans can be arranged quickly, often in 5-10 days. This is far quicker than the average property-backed loan, with traditional mortgages usually taking around 6 weeks to complete.

There is a price to pay for the speed and convenience with interest rates and fees usually coming in higher than with mortgages.

Bridging Loan Uses

Bridging finance can be used for almost any purpose, although there some common uses, such as:

  • To complete a purchase quickly (such as a property purchased at auction)
  • Funding the refurbishment of a property
  • To fund the forward purchase of a property before your current home is sold
  • To purchase a property below market value
  • Completing a purchase on an otherwise unmortgageable property

How Bridging Loan Applications Are Assessed

There are a few key factors in the assessment of bridging loan applications, the main ones are:

  • The ‘exit strategy’
  • The’ loan to value’
  • The applicant’s credit history
  • Experience of the borrower

The interest charged on a bridging loan is often rolled into the loan and paid on redemption of the loan. As such, strict affordability calculations aren’t needed in most cases.

The key to most bridging loan applications is how the loan will be repaid at the end of the term. The method of repayment is usually referred to as the ‘exit strategy’. Common exit strategies are for the property to be refinanced onto a traditional mortgage, or sale of the property.

Where the property in question is being sold, the lender will be keen to ensure the term offered is sufficient for the property to sell.

Where the exit strategy is through refinancing the loan to a mortgage, the lender will be keen to see proof that this is possible. Usually, a decision in principle from the new lender is accepted.

The ‘loan to value’ of the proposed loan is crucial to most applications, with rates increasing as the LTV increases. A higher loan to value increases the risk to the lender in the event of default, as such, lower LTV applications tend to see a simpler application process and a higher chance of success.

Although the monthly payments are usually added to the loan, most lenders will still pay attention to the applicant’s credit history. This is because there is still a chance of default through failure to repay the loan at the end of the term.

It’s still possible to get a bridging loan almost regardless of your credit history, you may be ineligible for some of the lower rate products.

Finally, experience can be a key factor for some lenders, especially where conversion or refurbishment work is to take place. Again, a lack of experience doesn’t mean you will be unable to secure bridging finance, it can limit the number of lenders that are willing to lend.

Bridging Loan Costs

Bridging loan rates are lower than ever, with rates for residential properties currently starting at 0.43% per month. This rate is only available up to 50% loan to value, with rates at 75% coming in from 0.64% per month.

Rates for commercial and semi-commercial bridging loans tend to be higher, with rates starting from 0.65%. Again, these rates are only available for LTV applications, with rates at 70% LTV starting from 0.84%.

Although low headline rates are available, they are for lower risk applications only, with rates of 1% common.

In addition to the interest charged, lenders will usually charge an arrangement fee – usually 2% of the loan amount. The lender arrangement fee can be higher, as much as 3% with some lenders and may reduce as low as 1% for low-risk, larger loans. Lender arrangement fees can usually be added to the loan.

Where a broker is used, some will charge a fee for their services, often as much as 1.5% of the loan amount. There are fee-free brokers out there, so choosing one of them can represent a considerable cost saving. Broker fees are also usually added to the loan.

4 Things To Consider Before Taking Out A Bridging Loan

The total cost of borrowing

Rather than chasing the lowest possible interest rate, consider the total cost of the loan before proceeding. Some lenders will charge additional fees, which can increase the total cost of borrowing, meaning a higher rate loan may actually be cheaper.

Other fees, such as broker fees can significantly add to the cost of borrowing, so always ask for and compare the total cost of borrowing where possible.

Am I getting the best deal?

The best deal isn’t always the cheapest deal. By talking to your lender or broker, you should aim to understand other factors associated with the loan. Always ask how quickly the lender will be able to complete the application and try to find out if the lender charges default interest rates if you’re unable to repay on time.

Remember, you’re looking for the cheapest loan that fits your purpose, not just the cheapest product. If the loan can’t be completed as quickly as you need it, it may not be of any use to you.

How the loan will be repaid

As mentioned earlier, lenders will be keen to know how the loan is to be repaid. This should also be your number one concern, if your exit strategy is far from guaranteed, you’re taking a big risk.

As with other types of secured borrowing, if you default on the loan, you’re risking repossession of the property. This risk can be dramatically reduced by considering your exit strategy carefully before you begin your application.

Is a bridging loan the most suitable product?

Bridging loans can be expensive, but invaluable in the right circumstances. Before committing time and money to finding the best bridging loan for you, consider whether there are other options available.

For lighter refurbishment projects or fast purchases, there may be mortgage lenders who are suitable. In this situation, you could open yourself up to big savings by going straight to a ‘term loan’.

Finance

From accountants to advisors: changing roles and expectations

From accountants to advisors: changing roles and expectations 1

By Chris Downing, Director for Accountants & Bookkeepers at Sage

The line between strategic advisor and traditional accountant is blurring. Over the last year, 82% of accountants said their clients were demanding a wider service offering, including business and technology implementation advice. In the current climate this transition has only been accelerated.

Clients increasingly expect their accountants to take a more active role in change management and predicting their cashflow months into an uncertain future. This is enabling businesses to tackle the challenges of day-to-day operations, while keeping an eye on what the post-COVID world will look like, and the support they will need to return to strength.

To solve these new and complex, expectations accountants must develop a different way of working. They will be required to increasingly supplement the traditional, compliance and reporting aspects of their work with business advice and consultancy. To do this, accountants need the ability to move quickly and efficiently, with a firm grounding in technology and data control.

Get straight to the point

The priorities of yesterday are very different to the goals of today. Where businesses once focused on driving growth and efficiency, the objective for many now is continuity – understanding what government support is available and for how long. In the current climate, speed of delivery and client care are top of the agenda.

But the way accountants go about this is very important. Rules are changing every day – the definition of an ‘essential business’, government support and bank loan programmes are constantly in flux. In normal times, an accountant’s role is to ensure their clients are aware of and reactant to these changes. Yet, how much value does this create for them in the ‘now’?

To be valuable, new information must be delivered quickly but it should also be succinct. It isn’t useful for clients to be bombarded with email updates, or reports running into hundreds of pages, trying to explain the week’s changes. With so much present noise, it’s the accountant’s task to break through the information overload and provide the client with crucial resource only.

To understand client pain points and get to the heart of what they really need, a running dialogue is essential. Building individual client relationships will unlock the potential to deliver tailored experiences that meet their business demands. Armed with this insight, accountants can then distil complex information into digestible chunks.

A more entrepreneurial spirit 

Sharing insight is only the start.  The other half of the story relies on consultancy. In the Covid-19 environment, the routine aspects of an accountant’s work are being supplemented with the transformative changes they can make for clients. Cashflow projections for the next six months are crucial, but even more so is the advice an accountant can offer on improving the financial outlook of a business.

Chris Downing

Chris Downing

To provide this balance, accountants should embrace a more entrepreneurial way of thinking. Not only advising on how clients can meet current challenges, but also how they can innovate to drive new revenue streams in the future. Part of this means being willing to step outside of their comfort zone. Many firms are already investing in the skills and technologies they need to service novel demands – like advising on relevant accounting and finance technologies.

While many businesses remain closed to the public, even as lockdown eases, they have increased capacity and flexibility to shift operations towards what will be most effective and profitable. Clients will be open to changing their business focus to meet demand spikes in other areas as they do not have to account for a disruption to customer service. For example, many distillers shifted production from beverages to hand sanitiser while bars and restaurants were closed.

With their contextual understanding of client finances, accountants are uniquely placed to advise their clients on change and guide them through the transformation process. Though this requires a more innovative model of accounting, and one that is willing to embrace the latest technologies.

Truth in the cloud

Business advice needs to be backed by data, especially for accountants engaging directly with the CFO. Scenarios need to be modelled, analysed, tracked and compared over time to arrive at the most effective proposal for the client. This is outside the wheelhouse of traditional accounting, but it’s becoming necessary in an industry heavily disrupted by new technologies.

To keep up with the ever-growing need for rapidly available data and analytics capabilities, more and more accountants are turning to the cloud to consolidate and use their data estate, while automating the time-consuming tasks of data management. Indeed, the majority (91%) of accountants have said new technology has delivered fresh value to their business in the last year, whether it increases productivity or frees up more time to focus on client needs.

Against the backdrop of coronavirus and technological disruption, a new breed of accountant is quickly emerging. Innovation is possible for those who stay ahead of client expectations and are aware of their needs, embrace an entrepreneurial mindset and adopt the latest cloud and automation technologies. In this way, an accountant becomes an integral part of their client’s business.

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Finance

Preparing for the new normal and building a financial plan

Preparing for the new normal and building a financial plan 2

By Donna Torres, director of small business at Xero UK

There is some light at the end of the tunnel for small businesses. As the lockdown continues to ease many retailers and hospitality businesses are now opening up again, or preparing to return soon.

Preparing for what’s around the corner has always been key to business success. Whilst there is still much uncertainty, it’s more important than ever that businesses get in control of their finances and create a solid plan.

Having a strong understanding of your cash flow and a plan for the months to come is vital to helping you prepare for what’s ahead. If you’re unsure where to begin, here are five ways to start:

Take stock

Financial experts Lauren Harvey (Founding Director of Full Stop Accounts) and Jonathan Graunt (Founder of accountancy firm FD Works and Xavier Analytics) recently spoke with Xero about the uplift in businesses taking an interest in their finances and understanding their financial position.

Businesses should be using this time to review their processes and really understand their numbers. It can be helpful to reflect on your original statement – what do you really want your business to do? And has the pandemic changed this? Use this as the fuel to drive your business vision forward.

Consider the risks

The government has provided SMEs with a number of support schemes, but the conditions and capital being offered is changing.

For example, the Furlough Scheme will currently only run until the end of October and the deadline to furlough new employees has now passed. The government will also gradually be reducing the amount it pays under this scheme. Make sure you’ve accountanted for this in your financial plan so you have a clear picture of how furlough tapering off will impact your business and any adjustments you might need to make.

If you’ve taken out one of the Government backed loans, now is the time to start building repayments into your financial plan. Building a solid plan will also help to ensure that you use the money in the best way to support your business in the long-term. It can be tempting to fight the most immediate fires with your capital, but try to think about the longer term health of your business – and where the money is going to have the most impact.

Adapting to a change in demand

Covid-19 has forced businesses to adapt to a lot of changes and SMEs should be thinking carefully about how their customer demand has changed. What do customers expect from you now? For example, many are still apprehensive of shopping on the high street. This might mean some of the options you offered during lockdown like deliveries or online services should remain.

Communicate with your customers as much as possible to get an accurate view of what they need from you now and in the future. How can you fulfil this? Then it’s important to look at the numbers and scrutinise which areas are going to provide the most return on investment.

Financial Planning: where to start?

For financial planning to be effective, it’s helpful to get into habits that will provide an accurate snapshot of how your business is performing. Reconciling bank transactions daily, creating a daily simple cash flow check-in habit and examining your profit and loss statements weekly will give you a better understanding of where your business stands.

Apps like Float or Fluidly will help to give you an accurate look at your cash flow in an easy to read visual. And the recently launched Xero Short-term Cash Flow tool can help you project your bank balance 30 days into the future, showing you the impact of existing bills and invoices if they’re paid on time. You can then work out which invoices you should follow up on.

Some people can find this task daunting, but your accounts aren’t just being kept for reporting to HMRC, they are also there to give you invaluable insight into your business and to plan for the future.

Ask for help

Your accountant is there to help you to understand your finances. This is likely to be one of the biggest economic challenges you have ever faced as a small business owner. Now, more than ever, it is time to lean on your accountant to help create a robust plan.

If you do not understand something, or need guidance or clarification, get in touch and ask for their expertise and advice. If their advice doesn’t help, ask them to explain it again.

You can also check out Xero’s online guide to managing cash flow here.

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Finance

The impact and implications of Covid-19 on financial reporting

The impact and implications of Covid-19 on financial reporting 3

By Mark Billington, Regional Director, Greater China & South-East Asia, ICAEW

The economic consequences of Covid-19 have been unprecedented, affecting activity in nearly every country in the world. Indeed, the latest forecast from the Institute of Chartered Accountants in England and Wales (ICAEW) projects that most economies in South-East Asia (SEA) would fall into recession in the first half of 2020 and Gross Domestic Product will contract by 1.9 percent over the whole year[1]. Across the region, governments have had to bring in various fiscal stimulus measures to protect the economy.

Exceptional times bring tremendous challenges for businesses and requires leaders to have a clear view on the short- and long-term effects of Covid-19 on their businesses, and to respond accordingly. This starts with taking extra care to recognise the impact of Covid-19 in financial reports, especially of events which have occurred between the balance sheet date and the date when the accounts are authorised for issue.

Distinguishing between adjusting or non-adjusting events

As the coronavirus outbreak continues to evolve and more information comes to light about the nature of the virus and its impact, companies with 2020 year-ends need to consider how it has affected their business and how the effects should be reflected in the accounts at the end of their reporting period. This boils down to distinguishing whether Covid-19 should be accounted as an adjusting or non-adjusting event.

In December last year, China alerted the World Health Organisation (WHO) to several cases of an unusual form of pneumonia in Wuhan, central China’s Hubei Province. But it was only early this year when substantive information on what has now been identified as coronavirus (Covid19) came to light. As a result, for companies with a 31 December 2019 year-end, Covid-19 is generally considered to be a non-adjusting event.

This changes for companies which have early 2020 year-ends, who will need to consider the timelines more carefully to assess the conditions at the end of their relevant reporting period. For companies with 31 March 2020 year-ends, Covid-19 is likely to be considered a current-period event, which means that companies need to assess and record all events and conditions that existed at or before the reporting date. When it is determined to be an adjusting event, a business will need to review all areas of the accounts that might be adversely affected by the COVID-19 virus.

There may be a greater degree of judgement required when identifying the conditions at the end of the reporting period, and a closer assessment needed of whether developments are adjusting or non-adjusting.

Exercising judgement about conditions at the balance sheet date

Companies have to exercise significant judgement to determine the conditions that existed at the balance sheet date. This is heavily dependent on the reporting year end in question, the company’s own individual circumstances and the events which are under consideration.

A number of factors should be considered when making judgements about conditions at the balance sheet date. This includes the timing and impact on stakeholders such as staff, customers, and suppliers, of travel restrictions, quarantines and lockdowns, closure of businesses and schools; and government support initiatives. With each of these events, companies have to determine whether an event shines a brighter light on conditions at the balance sheet date or if conditions changed after the reporting date.

Mark Billington

Mark Billington

This evaluation in financial reporting is important because it affects the forecasting of future income and cash flows, which are based on conditions that existed at the balance sheet date. Estimating recoverable amounts might be very different for the same asset if the calculation was performed for a 2019- or 2020-year end.

Upholding values of corporate transparency and trust

In these times of uncertainty and crisis, it is even more important to be transparent about risks and assumptions used in financial reports, and to make disclosures as specific to the business as possible, to avoid the risk of financial reporting being downplayed. In fact, market regulator Singapore Exchange (SGX) and rating agency Fitch Ratings have recently cautioned companies against using alternative performance measures such as Ebitdac (earnings before interest, taxes, depreciation, amortisation and coronavirus) in their interim financial reports to flatter results, and stressed that “disclosures must be balanced and fair and avoid omission of important unfavourable facts”[2].

More than ever, businesses must continue to diligently uphold values of corporate transparency and trust and continue to disclose transparent and quality information to investors and other stakeholders. In order to do this, directors are tasked with the important responsibility to comply with various reporting standards and understand the circumstances of particular disclosures to provide a fair and balanced assessment of the company’s financial position and performance.

Covid-19 also has significant implications for audit reports on company financial statements. Preparing and auditing financial statements poses tough calls in difficult and unclear circumstances for directors and auditors. It is vital that these uncertainties are interpreted appropriately and in the context of the current unprecedented circumstances

As the business impact of COVID-19 continues to unfold and affect economies and the future of many organisations, businesses should continue to consider both their situation but also the wider economic landscape they operate in and reflect that in their financial reports.

[1] ICAEW, “Coronavirus Global Outlook: after the outbreak”, May 2020

[2] SGX warns against use of ‘earnings before coronavirus’ metric, The Business Times, 27 July 2020

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