A director of an invoicing discount finance firm once told me that there was a major difference between invoice discounting credit management and that of bridging finance. In invoice discounting you had to constantly monitor and be wary of the borrower and the relationship is often adversarial. In bridging, the opposite applies – you work with the customer to achieve the best outcome for both parties.

In bridging, a key element is the exit route. Whether this is by refinancing, sale or other method, lenders need to satisfy themselves that the proposed exit is realistic. This means that the underwriting team need to consider a wide variety of issues.

In the case of a sale exit for example, they need to assess the chance of achieving the proposed sale price, the market in the location, the type of property and much more. Where the prospective ultimate purchaser is likely to need a mortgage; are there any location or construction factors which would make obtaining a mortgage difficult? Lenders need to consider if the term and the likely time to obtain a sale coincide. For refinance, bridging lenders need to assess if the refinance proceeds will be sufficient to cover the amount due by the borrower. A high proportion of bridging loans do not require interest instalment payments, as the interest is paid when the loan is redeemed. Any delay in repayment could result in interest and charges significantly eroding the original headroom. This problem is exacerbated when property prices are on a downward curve or when sales are sluggish. When things go wrong, lenders try to avoid litigation, which is not in the borrowers’ best interests.

The issue of affordability does not come into play initially, as no interest instalment payments are required, but it does apply when the borrower is seeking a long-term refinance loan.

Development loans require specialist lender expertise and the ability to step in to complete the project if the original contractor is unable to do so. It’s important to assess the ability of the borrower to carry out the project to completion.

Where practical, most lenders try to see the prospective borrower face-to-face to get a feel for their experience and their ability to meet obligations. It’s also a good idea for cases to be reviewed by more than one underwriter, as sometimes one can get carried away by what seems to be a good deal, without seeing the pitfalls.

Above all, contact with the borrower needs to be maintained on a regular basis to gauge progress of the exit route. If there are problems, it’s essential to have a relationship with the borrower so solutions can be sought well before the end of the loan term. Many lenders have funding lines which make it difficult to extend loan terms.

So, vigilance is a key factor, but so is the ability to assess risk. Bridging is a bespoke financial product which requires human intervention and the skilled underwriters who have a nose for risk will always be needed.

Benson Hersch, CEO of the ASTL

This article appeared in the February edition of CCR Magazine