The key to a high performing short-term loan book is excellent communication with your borrowers as well as quality underwriting. That's according to Central Bridging director Brian West, who says that a proactive relationship with borrowers, in which contact is made on at least a monthly basis, is a vital component to success.
It wasn't too long ago that bridge lending was considered a very niche product but fast forward a few years and the market is now estimated to be worth well over £4billion per annum.
As High Street banks suffered liquidity restrictions and tightened their criteria in the wake of the credit crunch a new breed of lenders emerged offering an increasingly diverse and innovative range of products. The flexibility of these new loans coupled with fast completion times has driven huge year-on-year growth in lending volumes, most particularly in the last five years.
West argues that short-term bridging loans can be an ideal solution for clients who need finance fast, either to resolve an emergency or to take advantage of a time limited opportunitybut for the lenders that offer these loans they can present a unique set of credit management challenges.
The key components of a successful bridging loan, typically written over periods of three-24 months, are a suitable asset, an acceptable use of funds and of most relevance from a credit management perspective, a strong, clearly defined redemption strategy, often referred to in bridging as ‘the exit’.
He explains: "Whilst a small number of bridging loans offer monthly servicing it’s fair to say that many don’t. Instead, interest on the majority of loans is charged up front, built into the gross loan advance and deducted by the lender at the point of completion. Given this fact it’s vital that lenders, in the absence of regular monthly contact with their borrowers to collect payments, maintain a rigorous focus on their post completion loan book.
"Since we started lending in 2010 we have always built a proactive relationship with our borrowers, one where we’ve maintained contact on at least a monthly basis to monitor progress on their redemption plans.
This regular interaction reinforces the borrower’s awareness of the short-term nature of our loans and the need to maintain an absolute focus on the redemption process.
A close relationship has the added advantage that it allows us to spot any potential problems early. We can then work with our borrowers to resolve these."
West confirms that whilst processing each loan request the company builds a strong relationship with borrowers and upon completion a letter is sent out confirming the redemption date of their new loan.
He continues: "This letter also advises them that we will be liaising regularly throughout the loan term to ensure everything remains on target. As the redemption date of the loan approaches we contact borrowers more frequently reminding them of both their obligations and the penalties for late redemption.
A significant majority of our loans are redeemed by the sale of the property being used as security. In such cases we often insert a specific clause into the loan agreement ensuring that the borrower provides us with a monthly report from their marketing agent detailing all interest, viewings and offers made on the property.
We may even insert an additional clause giving us the right to insist on a change of agent after a defined marketing period. Having this level of oversight and a degree of control when matters are not progressing as fast as they should can be an invaluable tool in driving timely redemptions.
Once a sale has been agreed we then ensure that the borrower’s solicitor keeps us fully appraised of the conveyancing process relating to the sale. "
Naturally, says Mr West, despite all the measures detailed above, late redemptions do occasionally occur "but by this stage we have invariably developed such a good understanding and relationship with borrowers that a fast and mutually acceptable solution can usually be found. In the credit management of bridging loans, as with so much in life, good communication is the key to successful outcomes."