When applying for a bridging loan, development finance or a similar product, your ‘exit strategy’ is your plan for repaying the loan in full and on time.
Understandably, lenders place great emphasis on the viability of applicants’ exit strategies, as part of their eligibility checks.
Your job is to convince your lender that your exit strategy is suitably robust, and that they will get their money back by an agreed date, come what may.
Why is an Exit Strategy Important?
In the absence of an exit strategy, a lender technically has no way of knowing if or when they will get their money back. It is possible to take out a bridging loan without an exit strategy – a product referred to as an ‘open’ bridging loan.
But as these ‘open’ facilities are considered higher risk on the part of the lender, they are more difficult to qualify for and always attach higher rates of interest.
Either way, having a concrete exit strategy in mind is just as important for the borrower as it is for the lender. Should your exit strategy fail, you will face the prospect of default charges and elevated interest rates until your debt is settled.
How Can I Be Sure My Exit Strategy is Solid?
Truth is, there is technically no such thing as a 100% bullet-proof exit strategy. Even if you have a buyer for your property or development lined up ahead of time, they could pull out at the last moment.
This is why it is important to take all possible contingencies into account, before applying for a bridging loan or a similar short-term facility.
Exit loans can often be taken out towards the end of an initial loan term, in order to provide additional breathing room. This is effectively an extension of the original loan term, or a separate product issued to repay the initial facility for repayment several months later.
If your exit strategy fails, this may be the only option you have to avoid heavy penalty fees and damage to your credit score.
What Exit Strategies Can I Use?
Bridging loans providers and development finance specialists are usually willing to consider almost any viable exit strategy. Even so, the most common options for exiting a short-term loan are as follows:
- Sale of the primary property
- Sale of other investments
- Refinance to a longer-term mortgage
- Sale of a secondary property
- Inheritance or use of personal savings
Understandably, some exit strategies are considered more robust and viable than others, which may be reflected in the competitiveness of the loan you are offered.
How Can I Boost My Chances of Qualifying?
Irrespective of your planned exit strategy, it is essential to seek independent broker support at an early stage. This will help you build a clearer picture of the options available, and put together a convincing case to present to your lender.
After which, your broker will negotiate on your behalf to ensure you get an unbeatable deal, keeping monthly interest and associated borrowing costs to the bare minimum.