It’s fair to say that Warren Buffett can be described as a thoroughbred “money man”. He has made billions of dollars in profits from his investments for close to 60 years.

Yet even with all of this tremendous wealth and experience in making money on his investment projects, Warren Buffett is still extremely cautious when it comes to playing poker.  In fact, his approach to the game goes something like this:

“If you’ve been playing poker for 30 minutes and you still don’t know who the patsy is, then it’s you!”

(By the way, according to the Collins Dictionary a “patsy” is described as being someone that is easily cheated or victimised.)

So, if someone as experienced as Warren Buffett recognises that under certain conditions he does not hold the strongest hand regardless of his past experience in the game, what does that tell a borrower about his (or her) position of strength when they are looking for a bridging loan?

In the decade when credit flowed freely (i.e. 1997 to 2007), it was borrowers who appeared to hold the cards.  Real estate projects were plentiful.  Financiers were all queueing up to get a piece of the action at virtually any price.  The capital markets were constantly on the lookout for projects to fund and this filtered through to all levels in the economy, including bridging loans.

During this time if someone had even a modicum of experience, they could secure a bridging loan very simply indeed.  Actually, bridging loans, mortgages, secured loans … almost all types of finance were available without any trouble.  A borrower could, in effect, take a very short walk to a lender, say their name and if this carried any recognition whatsoever, they would get money.  Just like that; as if by magic.

However, the financial markets have doled out a fundamental lesson to us all, lenders and borrowers alike, which is this:

Money is not meant to be “easy-peasy-lemon-squeezy” to come by.

Forgive the seemingly flippant expression above but that is exactly how many borrowers have become conditioned to regard bridging loans and other forms of raising capital.  Borrowers are meant to demonstrate that they have a truly viable project.  Borrowers are meant to prove that they and their project can pay the lender his interest and return the principal.  Borrowers are meant to show that they, too, are putting their neck on the line and they are willing to share a good amount of risk with the lender.

However, none of this can happen if the borrower believes he holds the strong cards and he has the strongest hand.  But just exactly whose money is it – the Lender’s or the Borrower’s?

As daft as that question may seem, many borrowers need to realise that it is the lender that holds the strongest hand at the moment and, dare we say it, the borrower is closest to being the “patsy”. (Not literally of course but hopefully you get our drift.)  The tables may well turn in future but for now that is the way it is.

Whether it be a bridging loan or any other type of finance that you are looking for at the moment, then borrowers please recognise that you are not in the position of strength in the current market.  Give a lender what he is looking for and, more than likely, you will get the bridging loan that you are looking for.

Just imagine, you shake the man’s hand and he says to you, “It was good doing business with you.”

Both of you walk away feeling very satisfied with the deal that you have just done together. You know how much you have to pay; he knows how much he is going to receive.  That is until you are further along in the transaction of course. Suddenly, the other party decides to increase the fees that he is charging you, change the fee structure completely or introduce a fee that was not previously agreed.

“But who on earth would do this in the bridging loan world?” you may rightly ask.

In short, a not-so-scrupulous bridging lender would do this.  Thankfully, there are not too many around these days.  But the reason why a bridging lender can apply fees as they wish, regardless of clear verbal discussions regarding fees or even written term sheets, is simply because they can.  Nothing more, nothing less.

A bridging loan is typically not regulated by the Financial Services Authority (FSA) and this absence of regulation makes it much easier for a bridging lender to ignore the principles of Treating Customers Fairly .  It is an unregulated product, at least with respect to the FSA, and this leaves the borrower applying for the bridging loan exposed to some degree.

It’s true that a solid business does not need to have good business practice forced upon it.  Good businesses tend to have their own internal code of conduct that will determine if they treat customers well or not.  However, a regulatory regime can help if it is well-defined and gives enough flexibility for a business to develop its own personality.  Such a regime can help a business to sharpen its focus by ensuring that a minimum level of quality is always delivered to its clients.

So, if a client receives clear verbal terms that the maximum Arrangement Fee (or “Facility Fee”) will be 1.5%, for example, legal fees will be £675 and the Valuation Fee will be no more than £1,000, then why should the borrower expect anything else?

It is fair to say, in defence of a bridging lender, that borrowers do often conceal information.  Therefore, when the necessary Due Diligence is carried out, aspects of a case can come to light that were not evident before.  However, it is not difficult whatsoever for a bridging loan provider to use this stage in the process as an excuse to insert additional fees or change existing ones.

“You never told us Mr Smith that you were borrowing through an SPV.  So we had to make a whole host of changes.  We will need a further £820 for legal costs from you.”

Clearly, Mr Smith had not planned to spend close to a further one thousand pounds to secure the bridging loan.  But what should he do – pay it or walk away from a, potentially, profitable deal?

Keep all of this firmly at the front of your mind when you are seeking a bridging loan.  Regardless of whether you are dealing with an adviser or directly with a bridging lender, bridging loans are unregulated.  Repeat this to yourself, almost, mantra-like so that you never lose sight of this potential pitfall.  Generally, companies that provide bridging loans are solid businesses, albeit expensive.  But it only takes one lender to ruin your experience of what is an essential part of the loans marketplace.  And be under no illusions, bridging loans are an essential part of the financial market mix.

Present your adviser or lender with a fully disclosed case.  Then if they adhere to good business practice, you will likely be issued terms very early in the process.  They will then stick to these terms which, in turn, will lead to no change in the costs of securing your bridging loan.

“We need a bridging loan to secure this deal and we need to get one fast!”

These words are the battlecry of many a property entrepreneur in the UK right now. The need for a bridging loan or some other kind of immediate finance is vital in the current market. Property prices have seen historic drops since late 2007, giving rise to some first-class opportunities for those that can get access to money quickly.

Despite their special characteristic of speed (i.e. bridging loan underwriters tend to know the specific kind of property they can accept all day long), there are times when a bridging loan is not actually a bridging loan at all. Let’s identify one of those situations when you think you are requesting a bridging loan but, in fact, you are actually asking for something else.

You see, a bridging loan can be used almost anywhere in the world and for virtually any purpose. From Croydon to the Caribbean and for pizza businesses to property portfolios, the bridging loan stands on its own in securing a deal for you – quickly.

Some transactions are an ideal setup for a bridging lender (or so it would seem). For example, imagine you’ve got the transaction below, a deal that could comfortably make you £450,000 or more for not a massive amount of work:

• Prime Location property (think Central London)
• High value property (think £5 Million plus)
• And plenty of “skin in the game” on your part as the borrower (see yourself with a minimum of £2 Million)

So tell me, what more could a lender want from you? Surely a transaction like this is the ideal bridging loan isn’t it?

Well yes … almost.

Something is missing from this “perfect scenario” and that something is the Exit Strategy.

Without a clear, defined and all-but-concrete exit strategy, what does the bridging loan transform into? It moves from being a bridging loan to being “equity participation”. In less technical terms, what started off as a loan to you changes into an investment by the lender who is now hoping that he is able to profit from the sale or refinancing of the property.

This is what borrowers continually forget. If they don’t have an exit plan for the project, then a lender becomes an investor and is taking a stake in something that may, or may not, pay off. The exit must be virtually assured. You are the one that wants to own the asset (even temporarily); the lender does not. They want to get paid an upfront fee for lending money and then earn interest on a loan.

This is when a bridging loan is no longer a bridging loan. When a borrower doesn’t already have an Agreement in Principle to refinance; or they don’t have a guaranteed buyer to close the project successfully, then that same borrower will very likely struggle to get the bridge finance quickly in the current market. (The exit doesn’t have to be cast in stone. Something close can also be enough. But it does need to be close.)

There is the saying that we should “Begin with the end in mind” when it comes to achieving goals in life. The same can be said of bridging loans because bridging lenders do not want to take a stake in your project, even by accident. They want a simple answer to the following question:

“How will I get my money back quickly and painlessly if I give you a bridging loan?”

Welcome to Bridging Loan Direct.

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