Short term finance is a diverse array of financial solutions designed to address immediate funding needs. Whether you’re an entrepreneur seeking capital for a new project, a business owner grappling with seasonal fluctuations, or an individual navigating unexpected expenses, short-term financing can be the answer to your financial challenges.

In this guide, we will explore different dynamic types of short-term financing that can empower you to seize opportunities and overcome obstacles with confidence. To assist our clients in navigating these options, we have compiled a concise guide to outline some of the most favoured choices:

  1. Bridging Finance:

Bridging finance stands out as one of the most popular forms of short-term property financing. Essentially, it is a specialized loan tailored for short-term needs. While interest rates tend to be higher due to the shorter repayment period, the flexibility offered in terms of loan duration, repayment conditions, and utilization is noteworthy. In its fundamental form, bridging finance can be applied to a wide range of purposes. Nevertheless, it is frequently utilized for property development or to facilitate property purchase, such as breaking the chain in a property transaction.

It is crucial to demonstrate to the lender a well-thought-out exit plan when seeking bridging finance. This plan provides the lender with confidence that you have a clear strategy for repaying the loan as agreed upon.

calculating business finances

  1. Auction Finance:

When considering the purchase of a property at an auction, it is often necessary to secure short-term financing to fund the acquisition. Auction properties typically have a strict completion deadline, typically 28 days from the auction date. This tight timeframe can pose challenges when attempting to arrange traditional mortgages, which usually have longer processing times.

Auction properties often come to market for various reasons, including repossessions, inheritance, or due to their state of disrepair requiring renovation. If your property requires renovation work before it qualifies for a mortgage, auction finance can cover these expenses. Moreover, auction properties may involve more extensive legal paperwork, resulting in higher legal fees. Auction finance can also assist in covering these additional costs.

  1. Development Loans:

Development finance is divided into two main categories: building from the ground up on land you already own and transforming an existing property into something different. For new construction on owned land, securing planning permission is a prerequisite. Lenders typically favour experienced developers and may require a track record of success.

Development finance can take the form of a straight loan, covering up to approximately 70% of the Gross Development Value (GDV). Repayment, including interest and principal, occurs upon project completion. Alternatively, a joint venture loan is an option, where an investor provides 100% of the capital and shares in the profits once development is finalized.

For property conversions, especially into residential flats, lenders prefer experienced applicants who can present a viable business plan and demonstrate the ability to adhere to proposed timelines. A deposit of around 30% is commonly required, with interest rates varying based on individual circumstances.

  1. Commercial Property Finance:

Commercial property finance is appropriate for purchasing or converting commercial properties or for business purposes using a Special Purpose Vehicle (SPV) to enhance tax efficiency. While some similarities exist with bridging and development finance, these loans are typically unregulated since they pertain to business activities and are not subject to FCA consumer regulations.

The terms of these loans closely resemble those of bridging and development finance, with variations primarily due to different associated risks. Commercial properties can offer higher rental yields than residential ones, but tenant markets may be narrower, and rent arrears can pose challenges.

Choosing the Right Short-Term Financing for Your Needs

These various forms of short-term property finance cater to the diverse needs of individuals and businesses engaged in real estate transactions. It is important to consider the specific requirements and circumstances of each financing option to make an informed choice that aligns with your objectives.

As you start on the quest to secure short-term finance, it’s crucial to evaluate your unique financial requirements, repayment capabilities, and risk tolerance. Research and compare the terms, interest rates, and repayment schedules of each financing option, and choose the one that best aligns with your goals. Remember that short-term financing is a valuable tool when utilized wisely, offering the agility and responsiveness necessary to navigate the ever-changing landscape of personal and business finance.