Bridging Loans
As your business grows, there may be times when you need additional short-term financing.
If that situation arises, you’re not alone. In 2023, a remarkable £831 million in bridging loans was processed. Despite interest rates hitting their highest average since 2015 last year, we still witnessed a record number of bridging loan transactions, with the main reason for their use being to prevent property chains from collapsing.
If you’re curious about what a bridging loan is, you’re in the right place.
Bridging loans offer a quick solution for obtaining working capital to buy property. With repayment periods typically between 12 to 24 months or less, these short-term loans provide immediate cash flow while you wait for longer-term funding, such as a commercial mortgage.
Here’s everything you need to know if you’re considering a bridging loan for your business.
What is a bridging loan?
A bridging loan is a type of secured business loan used to bridge the gap between finding a property and securing funding, for example, by selling a previous property. Bridging loans can be used to:
Buy property at auction
Purchase land for development
Invest in commercial property
Renovate existing property
They are short-term loans, generally spanning a period of up to 12 months and they usually come with higher interest rates when compared to a more traditional fixed term commercial mortgage.
Example: Imagine you’ve discovered the ideal location for your new salon, made an offer, and are ready to proceed. There’s just one issue: you’re caught in a chain. To finance your new salon, you need to sell your current property, but your buyer is waiting for their buyer, and the chain continues. If one buyer’s commercial mortgage gets declined or someone in the chain withdraws, you risk losing your new salon. In this scenario, a bridging loan could assist by allowing you to finalize the purchase of the property, with the option to repay the loan later once your own property sale is completed.
How do bridging loans work?
Once you’ve identified a property you’d like to buy, the bridging loan process typically involves the following steps:
Search: Look for a lender, loan, and terms that suit your needs. A broker like Funding Options by Tide can assist you in this process.
Apply: After finding a suitable lender, gather and submit the necessary documentation. This may include details about the property, a business plan, cash flow forecasts, and an exit strategy.
Approval: If the lender is satisfied with your documents, they may conduct a credit check on you or your business. Keep in mind that this could result in a hard inquiry on your credit report.
Purchase: Once approved, the funds will be released, allowing you to pay the seller.
Repayment: You may need to make monthly interest payments, or the interest could be rolled up to be paid in full at the end, with some lenders offering a hybrid option. Typically, you’ll repay the bridging loan in full after selling your previous property, selling the new property, securing a mortgage, or obtaining another form of funding, including any fees and interest.
Types of bridging loans
Bridging loans come in various forms. Here are some options you might encounter:
Residential Bridging Loans: These assist in purchasing residential properties or developing residential land while waiting to sell an existing property.
Commercial Bridging Loans: These provide funding for buying commercial properties (like shops, offices, and retail spaces) and for refinancing commercial real estate.
Auction Finance: This enables quick purchases at property auctions, where payment is often needed before securing additional funding.
Development Finance: Specifically designed to finance renovation, development, or construction projects, whether on a large scale or for properties you already own.
Open vs. Closed Bridging Loans: Closed loans have specific repayment dates, while open loans do not have set repayment dates but must be repaid in full within a designated timeframe (usually a year).
First vs. Second Charge Bridging Loans: First charge loans are for properties without existing secured finance, while second charge loans apply to properties that already have loans against them.
Fixed vs. Variable Bridging Loans: Interest rates can be fixed, providing stable repayment amounts, or variable, where the amounts may change.
IPO Bridging Loans: This less common option covers the costs of taking a company public until funds from the Initial Public Offering (IPO) are available.
What can I use a bridging loan for?
Bridging loans are an ideal funding solution for various specific situations, including:
- Preventing or resolving a chain break
- Renovating a property to enhance its rental value
- Purchasing land or property at auction
- Building a new property with plans to sell within one to two years
- Acquiring land for development
- Securing a desirable property while waiting for a mortgage to be processed
- Buying new commercial premises before selling your current location
- Converting or extending existing commercial premises
- Investing in a property portfolio
- Covering relevant tax payments
- Financing a buy-to-let investment
What do bridging loans cost?
While bridging loans provide quick access to funds for property purchases, they often come with higher costs compared to traditional mortgages, making timely repayments essential. These costs may include:
- Elevated monthly interest rates (often 20% or more)
- Extra administrative, legal, and exit fees
- Risks to your property if repayments are not made on time
How much could I get with a bridging loan?
Eligible borrowers funding property investments can be eligible for loans of up to £20M. In most cases, you can borrow up to a loan-to-value (LTV) ratio of 75% of the value of the property.
Who can apply for a bridging loan?
Eligibility for bridging loans typically hinges on the robustness of your “exit plan,” which outlines how you intend to repay the loan and its interest by the end of the term.
A strong exit plan should demonstrate to lenders that you have a clear route to more permanent financing, such as obtaining a commercial mortgage or funds from an anticipated property sale.
Common users of bridging loans include:
Property Developers: These loans help property developers quickly buy land, fund construction projects, or renovate properties for resale, allowing them to capitalize on profitable opportunities.
Real Estate Investors: Investors can use bridging loans to acquire properties at auctions or to act on time-sensitive deals, helping them grow their portfolios and enhance returns.
Small Businesses and Startups: New businesses often need immediate capital for various needs, such as buying equipment or acquiring new commercial space.
Entrepreneurs: Bridging loans can help entrepreneurs fill financial gaps during expansion or when securing new business locations.
What are the benefits of bridging loans?
Bridging loans can benefit your business by providing short-term funding, ensuring you have access to the necessary working capital when you need it.
Key advantages include:
Flexibility: Bridging loans offer adaptable financing terms to suit various business needs, such as property investments and renovations.
Speed: These loans allow for quick access to funds, with applications typically approved and disbursed much faster than traditional mortgages.
High Limits: Because they are secured against an asset (like property), bridging loans can often provide larger amounts than unsecured lending options.
What are some of the possible risks associated with bridging loans?
While bridging loans provide quick funding for growing businesses, they also carry risks, such as the potential for foreclosure on a secured property, making timely repayments essential. Additionally, they typically involve higher costs and interest rates. It’s crucial to consider how taking a bridging loan might affect future mortgage applications.
Using short-term funding requires caution, as you’ll need to repay a significant amount in a shorter timeframe compared to a traditional mortgage. If you encounter challenges with repayments, don’t hesitate to reach out for assistance.
How to find a suitable bridging loan
Start by carefully evaluating your personal situation. Is a bridging loan truly the best option for you and your business, or would a commercial mortgage or buy-to-let mortgage be more suitable?
Once you’re certain about pursuing short-term funding, compare different lenders to find the right fit. Don’t focus solely on interest rates, even though they matter. Also consider the terms, repayment duration, and what the consequences would be if you miss a payment. Ensure you understand if a personal guarantee is required and how it could affect your credit score.
FAQs
You might still qualify for a bridging loan even with bad credit, as these loans are secured, making them less risky for lenders. However, your options may be limited, and you could face higher interest rates. To enhance your chances, consider improving your credit score by making consistent repayments, settling any outstanding debts, and maintaining a good gap between your credit limit and usage.
An exit strategy is crucial when applying for a bridging loan, as it’s often a key factor lenders consider. This strategy outlines your plan for repaying the loan within the specified timeframe.
To create an effective exit strategy, begin by detailing how you intend to repay the loan. For instance, you might plan to secure a mortgage on the property once you acquire it or sell it after completing renovations.
Next, establish milestones and a timeline. Consider how long each step will take and what your backup plan is if challenges arise—like a builder getting sick. Will you still be able to meet your loan obligations?
Then, specify how much you need to borrow, your expected earnings, and your personal contribution. Don’t forget to include the amount of your deposit.
Finally, gather supporting documentation to strengthen your exit plan. This may include contracts with contractors, discussions with prospective buyers, or property appraisals.
From application to the funds being released, they usually take anything from a few days to a few weeks.
Only you can answer that question, but do remember due to their short term nature, bridging loans carry increased risk. Consider all your bases and spend some time thinking about what you’d do if something goes wrong.
Typically, you'll need to provide a deposit of around 25% of the property's purchase price. While it may be possible to skip this deposit in certain situations, it’s generally not advisable, as it can lead to higher interest rates and less favorable terms. If you choose to pursue an arrangement without a deposit, it's wise to consult a financial advisor to fully understand the associated risks.
Improve your credit score, build out a strong exit strategy, and leverage a bigger deposit.
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