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About Business Bridging Loans
If you need to “bridge” the gap between buying commercial properties and funds becoming available, then you could consider a commercial bridging loan.
A commercial bridge loan is a short-term financing option primarily designed for property developers and landlords, including those who want to buy at auction when prices are low and funds are needed instantly.
However, commercial bridging loans are not just limited to buying property. They can also be used to cover the cost of projects such as renovation work, business expansion or improving cash flow.
The average commercial bridging loan has a duration of 12 months, though it can range from one month to five years.
There are a number of different types of property a commercial bridging loan can be used to fund, including residential investments, retail units, offices, restaurants, pubs and bars.
Bridging loans are a specialist product, and most business bridging loan lenders require you to go through a broker to access these funds.
Partner SpotlightThink carefully before securing other debts on your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debts secured on it. Bridging loans can be regulated and unregulated depending on what type of borrower you are and how much you need. Always check the status of any financial product you take out.
What is a commercial bridge loan?
A commercial bridging loan is a short-term form of funding that can be used to “bridge” the gap between finance becoming available and a purchase that is required immediately.
A commercial bridging loan is also known as an unregulated bridging loan. This is when the property used as security is either a business or an investment that the borrower or their immediate family will never live in.
This contrasts with a regulated bridging loan, which is used for residential property that the borrower lives in or intends to occupy in the future.
Other terms for bridging loans include bridge financing, interim financing, gap financing, gap loans or swing loans.
Commonly, bridging loans are repaid within a maximum of 12 months and are often used by developers and property investors who want to take advantage of time-sensitive market conditions and investment opportunities.
There are two main types of business bridging loans: open and closed.
Open bridging loans
With an open bridging loan, you will have more flexibility as there is no fixed repayment date, but you will often be expected to pay the money you owe within a year. This type of loan can be useful if you are not sure when the sale of your existing property will be completed.
Closed bridging loans
In the case of a closed bridging loan, you will receive a fixed date by which you need to repay the loan. This is often the solution for someone who has exchanged contracts and is simply waiting for an agreed property sale to be completed, or a mortgage agreement to be confirmed, and needs the money ahead of time.
How do commercial bridge loans work in the UK?
The application-to-funding process tends to be far faster for bridging loans than traditional loans. However, the trade-off for this speed is a short-term repayment period and much higher interest rates.
Instead of monthly repayments, the lender is repaid in full once your property has been sold or other financing such as a mortgage is secured.
You will also pay interest on your bridging loan until it is repaid in full. This interest could be paid monthly or as a single lump sum when the loan is paid off.
There may also be other costs such as an arrangement fee.
When you are applying for a commercial bridge loan, you will need to secure the loan against a high-value asset, typically property.
Bridging loans can be secured against more than one property, including simultaneously the property being sold and the property being bought.
What are the advantages of a commercial bridge loan?
The advantages of a commercial bridge loan include:
- Quick access to funds — depending on the provider, you can receive the funds from a business bridging loan lender in as little as 24 hours.
- You can act fast and secure investment opportunities if they arise before your financing is in place.
- Buildings in a poor state of repair will still be considered, unlike some commercial mortgages.
- Greater flexibility in regards to both borrowing (often including no Early Repayment Charges) and the types of property that can be financed.
What are the disadvantages of a commercial bridge loan?
Bridging loans will not suit every purpose, so it is important to keep in mind the following:
- Due to the short-term design of the product, interest rates are high for commercial bridging loans.
- Most lenders will charge administration, processing and completion fees.
- Funds will be inaccessible if you do not have a strong and realistic exit plan.
- If your commercial bridging loan goes over term, you run the risk of your security asset being repossessed.
Is bridging finance a good idea for my business?
When assessing whether a bridging loan is the right fit for your business, you should consider the following:
- If you don’t need funds immediately, there may be cheaper options available such as a commercial mortgage.
- Whether you have a strong, realistic exit strategy, and access to a back-up plan if your initial repayment method falls through.
- If you can afford the total cost of the bridging loan, including interest, fees and other charges.
What are the criteria of a commercial bridging loan?
To get a commercial bridging loan, you will need to put up an eligible high value asset as security. Acceptable security for a commercial bridging loan usually includes:
- Shops and retail units
- Offices
- Restaurants
- Factories
- Hotels
- Warehouses
- Care homes
- Developed land with planning
- Land without planning
- Farmland
You will also need to match the minimum turnover as specified by your lender. Other criteria may apply such as a minimum tenure as a trading company.
To qualify for a commercial bridging loan, at least 40% of the property or land in question needs to be used for commercial purposes. This rule is mainly applicable for semi-commercial property, such as a shop with a residence above that you intend to occupy.
Lenders will be interested in your exit strategy and the realistic likelihood that you can repay your loan before it comes to term.
Lenders may be more wary of your credit score if it affects your ability to execute your exit strategy such as if you plan to remortgage.
How to apply for a commercial bridging loan
To apply for a commercial bridging loan, you will need evidence of the value of the property that you plan to buy with the loan and the price you are paying for it. You may also need to provide additional information, including:
- A clear repayment, or exit, plan. The two standard routes are either selling a property, or refinancing using another product such as a commercial mortgage.
- Confirmation that the repayment term you have requested is realistic.
- A back-up plan in case your preferred repayment method falls through.
What kind of fees are involved with bridging loans?
The main fee attached to bridging loans is the interest rate. Your interest rate will be priced on the risk of your loan.
On top of this will be various fees and charges. These could include arrangement fees, valuation fees, and legal fees.
How much can a business borrow with a bridge loan?
Around £25,000 is seen as an appropriate starting point for a bridge loan — other financing options may be better suited if your business requires less than that.
As for an upper limit, this will depend on the borrower but there doesn’t tend to be a maximum amount you can borrow, as long as you can make the repayment and pay the deposit.
How much deposit do I need for a commercial bridge loan?
Most bridging loans have a maximum loan-to-value (LTV) ratio of 75%. This means you would require a deposit of at least 25% of the value of the property you are looking to purchase.
For example, if the property cost £200,000, you would need a deposit of £50,000 to access a bridging loan of £150,000.
Are commercial bridge loans safe?
Bridging loans can be expensive, and the biggest risk is that you will miss the repayment deadline. Bridging loans are given on the assumption that you can repay the debt you take on by selling another property to release the funds. If that sale falls through, you will need to have an established back-up plan that will help you to make repayments or you will be hit with significant fees.
You also face the risk of the property you put up as security being repossessed.
What is more, commercial bridging loans are currently unregulated, meaning there is no Financial Conduct Authority protection or supervision.
What’s the alternative to a bridging loan for businesses?
Some buyers will find that a commercial mortgage will work as an alternative to a bridging loan, but generally this is only for less time-sensitive situations.
Other alternatives to a commercial bridging loan include:
- Asset refinancing
- Invoice finance
- Property development finance
- Secured business loans
- Small business loans
- Start-up loans
- Business credit lines
Business Bridging Loans FAQs
Many of the biggest high street banks and private lenders offer bridging loans.
However, many work through a loan broker, rather than offering bridging loans directly to the public, to ensure that the borrower has access to financial advice.
Yes, limited companies can get a bridging loan. In fact, because they are secured against property, they are technically available to everyone, from private individuals to established firms.
The process of application, approval and offer can take as little as 24 hours, depending on your lender.
Since commercial bridging loans are seen as riskier for lenders than residential bridging loans, their interest rates tend to be higher.
It is possible to secure a commercial bridging loan against either a property your business already owns or a property that you are buying.
You can also secure the bridging loan against other high-value assets, such as development land with planning, land without planning, and even farmland.
For commercial bridging loans, interest tends to be paid one of three ways:
- Retained interest — this is when you borrow the interest payments on the loan as well as the loan itself.
- Rolled up interest — each month’s interest is added to the overall loan balance. This means the interest will be compounded, as it will be calculated each month on the loan balance including the existing interest.
- Monthly interest — you pay the interest due each month.
One of the main advantages of a bridging loan is its flexibility. This includes the fact there is nothing stopping you paying it off early.
Most lenders will not require an Early Repayment Charge if you pay off the loan before it comes to term.
This can apply to both open bridging and closed bridging loans.
Not only do many lenders only offer bridging loans through a broker, you should also get additional financial advice to help ensure that you are making the right choice for your situation and that you provide everything needed to be successful in your application. Always check the broker you use is qualified to give appropriate financial advice.
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