Many property businesses tackle the problem of cash flow frequently. Professional property investor needs sudden short term funding when they see a promising opportunity. Such situations can put a lot of stress on them.
How you manage short term finance to not let such an opportunity to go out of hand or cover any downfall?
We have compiled a list of the advantages and disadvantages of different short-term finance options. This will help you decide what can meet your funding needs.
When to go for Short Term Finance?
At times the third party can delay or step away from releasing cash on time. This might hold your project and put it on risk. Below are some of the scenarios when you need short term finance.
- Bridging: When buying property relies on the release of cash from selling out of another property. Temporary finance can help when a purchase is required to proceed before finalizing the linked sale.
- Unpredictable Liabilities and Costs: You might face scenarios where your previous budget may not meet the requirements as planned by you. You may need a shorter loan that can be paid back after the sale or after the property starts generating income.
- For Construction and Renovation Costs: At times institutional lenders demand the property to meet certain specifications before lending longer term finance. In such situations, you can go for a shorter loan to get the necessary work done.
What are your Options to fulfil these Shorter Funding Goals?
1. Borrow from Personal Funds
This option is like putting your saving into use to meet your requirements. Going for this option allows you to not to rely on external sources for your funding purpose. It may seem the most obvious and easiest way to meet short term goals.
Transferring money is not going to be an easy thing if you are trading under a limited company structure. The transaction needs to be formalized for tax purposes.
You can lose some tax advantages that you may have built if you borrow from your tax-efficient investment. This means it is not a cost-effective option for short term loans.
2. Development Finance
Most of the time banks don’t understand the requirements of property professional and coming into agreement with the traditional lender for funding can result in headache. Development finance is a great alternative as it can meet requirements for refurbishment, new buildings, and conversions. In case you want to make changes to the terms of your agreement because of the short term requirements, a personalized approach is more likely to meet your requirements as compared to the inflexible approach usually taken by banks.
3. Business Loans
This is one of the obvious options that people go for when they need to finance. Many smaller firms can source fund from this option. This means that the way of funding business loans by the bank is slow to meet the business requirements.
In case you have a great relationship with the bank and they know your business model, then it’s somewhat easy to get your business loan to approve. If you are a first-timer, the bank will check your eligibility and due diligence. This makes it a bad option if want short term finance immediately.
4. Leveraging your Overdraft Facility or Business Credit Card
You can go for this option if the required amount is relatively smaller and it can be fulfilled by the maximum limit of overdraft or credit card. But before that, you need to ensure that you can repay the debt or else you can end up paying high-interest rate on the amount.
5. Second Charge Mortgages
You can extend the amount that you have borrowed under your existing mortgage loan. But the problem is this isn’t a practical solution for all the borrowers. There might have been changes in the circumstances from the time you have got your mortgage approved for the first time. You may have to face certain difficulties now to pass the lender’s affordability test. This can also mean large repayment charges or higher interest on the entire loan than before.
What is the Second Mortgage?
You get the second mortgage from a different lender and it will replace your existing mortgage. This can help you get equity from current rental property and fund the renovation or purchase of the second property.
This offers buyers the opportunity to meet their short term funding requirements. This interest-only type of financing can be used in multiple circumstances like if you need cash flow to meet sudden or unforeseen requirements. At times you may need to hire more labour or additional material to continue your work; in such situations, you need to put bridging loans into work. When you opt for open bridge borrowing, there is a minimum period of one year to repay and there isn’t any penalty for repaying it early. The minimum bridging loans cost is £30,000 with no maximum payment. It is a flexible option and capable of meeting your requirements.
We hope these short term loans options will help you decide which one work better for your situation.