Bridging Finance Is Priced On The Exit, Not The Borrower

Bridging and similar short-term secured facilities are assessed on a different question from ordinary lending. The lender is asking how it gets its money back, not whether monthly payments are affordable.

The exit is the underwriting question

These facilities run for months rather than years and are repaid in a single sum. The source of that sum, the exit, is the central item in the assessment.

Typical exits are the sale of a property, completion of a longer-term refinance, or receipt of an expected payment. Each is examined for how likely and how timely it is.

Where the exit depends on a sale, the lender forms its own view of saleability rather than accepting an asking price, since it may end up realising the asset itself.

Security carries the risk

Because repayment is concentrated at the end, the lender protects itself through the asset. The amount advanced is set as a proportion of a valuation, leaving a margin.

The margin absorbs falls in value, costs of enforcement and accrued interest. A lower proportion advanced is the main way risk is managed.

Where the security is unusual, difficult to value or slow to sell, the proportion advanced falls further and the price rises to match.

Interest is often not paid monthly

Many of these facilities retain or roll up interest rather than collecting it, so the borrower makes no payments during the term and the balance grows.

Retained interest is deducted from the advance at the outset, meaning the borrower receives less than the loan amount while owing the whole of it.

Either way the debt at redemption exceeds the sum drawn, and comparing the advertised monthly rate with an annual rate on ordinary borrowing understates the cost.

Fees form a large part of the cost

Arrangement fees, valuation fees, legal costs on both sides and exit fees are standard, and on a short term they represent a substantial proportion of the total cost.

Because the term is measured in months, fees do not amortise into insignificance the way they can over years, which is what makes short-term borrowing expensive.

The relevant comparison is total cost to redemption against the benefit of moving quickly, rather than any rate expressed per month or per year.

Overrunning is the common failure

When an exit is delayed, the facility passes its term and default terms apply, which usually means a higher rate on a balance that has already grown.

Extensions are negotiable but are granted on the lender's terms at that point, when the borrower's alternatives have narrowed considerably.

Regulation of these facilities, and whether they fall inside consumer protections at all, differs by jurisdiction and by whether the borrowing is for business or personal purposes.