Bridging loans are short-term flexible loans that can be arranged quickly. If you are self-employed, it is possible to get a bridging loan. After all, around 15% of all workers are self-employed and this is rising each year, and many of them want access to loans, so it makes sense for lenders to cater to the sector.
If you own your own home and are self-employed, your home can be used as security for the loan. Some lenders will consider other security assets. If you own a business, assets of the business can be considered, such as buildings, equipment, outstanding invoices, and business equity.
What can a self-employed bridging loan can be used for?
Bridging finance is flexible and can be used for a number of purposes. Most bridging loans are used to quickly complete a house sale or to break a house buying chain.
Many self-employed people invest in redeveloping property bought at auction where the full purchase price of a property must be paid within 28 days. This period can be too short to secure funds from a standard mortgage. A bridging loan can be used to complete the purchase then repaid after long-term finance has been arranged.
Self-employed business owners can use a bridging loan to cope with temporary cash flow issues, purchase premises or buy bulk stock items.
To obtain a bridging loan a self-employed person will normally be required to prove their financial status. This will be in the form of two years’ worth of business accounts, though some lenders are prepared to look at just one year’s if that is all that is available. A lender may also need copies of bank statements. It is possible to get a loan with less than a year’s accounts for startup companies.
The affordability rules are less strict for bridging loans than mortgages. The bridging lender is more concerned with the exit strategy than financial status. An exit strategy is a plan for when and how the loan will be repaid; for example, if the repayment of the loan is dependent on the sales of property, then the value of the property and the likelihood of a sale is more important than the income of the self-employed borrower.
A bridging loan application from a self-employed person is assessed by a risk assessor. Mortgage lenders tend to apply strict lending rules when assessing applications, but a bridging lender assessor is more flexible. If they regard a loan as high risk, it may still be offered, but at a higher interest rate that reflects the level of risk.
A loan application can be made by a self-employed person no matter what type of business they own or co-own. The applicant can be a sole trader, in a partnership, or a director of a limited company. Loans can be applied for by both individuals and companies.
It is even possible for a self-employed person who is temporarily not working to obtain a loan.
Interest rates and fees
The interest rate for a bridging loan is charged month by month. There is no fixed interest rate like mortgages, each individual application is assessed and interest charged according to the risk level. There will also be a loan arrangement fees and legal charges.
Bridging loans are usually for 12 months or less. It may be an advantage to take out a loan for a longer period than the borrower thinks they need in case there is a delay in obtaining the funds to repay the loan. There will be no penalties if the borrower finds that they can repay the loan early.
A closed bridging loan will have a fixed repayment date. An open bridging loan will have no fixed repayment date but repayment will be expected before the end of the loan period. If the loan is not repaid in time, then the lender will work with the borrower to find a way to secure repayment.
Many self-employed people struggle financially as they work to grow a new business. For a year or two, cash flow can fluctuate widely from month to month. This may result in paying creditors late. Creditors often inform the credit score agencies about late payments and this will result in the self-employed person having a low credit score.
A bad credit history does not necessarily disbar a self-employed person from obtaining a bridging loan. It is possible to apply for a non-status loan which does not take into account credit history or income. A successful application will be based on the value of the asset used as security and the strength of the exit strategy.
The most common asset is a home. The lender knows that if the loan is not repaid, then the home can be sold to cover the loan repayment. Obviously, the borrower must be certain of their exit strategy otherwise their home could be at risk.
A bridging loan is useful for raising short term capital, and this can be especially suitable for a self-employed person that requires funds to help their business grow. Like all loans, there are risks, so it is useful to obtain financial advice. An independent financial advisor with an expert knowledge of the bridging loan market can help clarify the risks and benefits of bridging finance.
A bridging finance broker will be able to assess the loan requirements of a self-employed person. They will contact a number of bridging finance companies and obtain an initial acceptance of the loan application, usually in less than a day, If the terms and fees of a loan offer are acceptable, then the borrower can start the application process. The broker will help the borrower prepare the correct documents to support their application.
Start the loan application
If you are self-employed and need a bridging loan, your first step is to talk to Ascot Mortgages. Explain your circumstances and why you need a loan. We will do our best to match your individual requirements with the best loan provider.
We have long relationships with a number of specialist lenders and have helped many self-employed people secure bridging finance.