Bridging Loans

A commercial bridging loan is used by businesses for short-term borrowing to bridge funding caps, particularly when it comes to real estate.

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Bridging Loans

What is a bridge loan?

A commercial bridging loan is a type of short-term financing—12 months or less—that provides an immediate cash boost while you wait for longer-term funding. Used to "bridge the gap," financially, commercial bridge loans are used by business owners who want to buy office space or commercial property, while waiting for the sales proceeds from selling their current business premises, or until they have a more permanent commercial loan in place, i.e a commercial mortgage.

If you decide to take out a bridge loan, you can do so from traditional lenders, such as high street banks or finance marketplaces like Funding Options. Keep in mind that it will be secured against an asset, such as your property, hence, if you don't meet the monthly repayments, business-critical assets could be at risk. Let's take a closer look at how bridging loans for commercial property work. 

How does a bridge loan work?

A bridge loan can come in handy if you're buying a property, but are still waiting to receive the cash for the sale of an existing property. In this instance, you could use the loan to cover the costs of purchasing the new place. Short-term financing can also be used if the bridging loan falls through. 

What can I use a property bridging loan for?

There are many occasions when a property bridging loan can come in handy. You can get instant short-term cash for the following business activities.

  • Buying a property at auction

  • Paying for renovations to office space

  • Buying land for property development 

  • Purchasing a commercial property

  • Moving to a new office space

  • Putting down a deposit for a buy-to-let property

When should I apply for a bridge loan?

Individuals, property developers and small businesses can all use commercial bridge loans. Let's take a quick example of how the process would work with a company that wants to move to new premises. 

1. A company is expanding and wants to lease a new commercial property.

2. A significant deposit is required, and the rest will be borrowed through a commercial mortgage.

3. The company can cover the majority of the deposit but needs a small loan to cover the balance.

4. The company takes out a bridge loan to ‘bridge the gap’ and cover the remaining deposit amount.

5. The loan and interest are repaid before a commercial mortgage is approved.

In most cases, the borrower can add the loan's monthly interest payments to the balance of the loan and pay everything off at the end of the term. 

Bridging finance is designed, typically for short-term financing, and is a type of business loan similar to secured loans. You'll need to meet the lender's eligibility criteria and have a valid "exit" plan. An exit refers to how you're going to repay the loan and interest, or how you plan to move it onto a more permanent type of finance, like a commercial mortgage.

Some businesses also use bridge finance when they need a quick working capital boost. A startup, for example, might seek out a bridge loan when it's waiting for its equity financing round to close, using the cash to fund operational costs such as payroll, inventory, rent, utilities and any other business expenses.

Other businesses use bridge finance to take advantage of time-sensitive inventory deals. If you have a robust credit history, equity, or a way of paying off the loan and security, it's possible to get a property bridging loan, even if you have a poor credit rating—as long as your business is registered in England or Wales.

Application criteria for a commercial bridge loan

If you’re unsure whether your application for a bridge loan will be accepted, you can use our business loan calculator below to find out how much you could borrow (and afford to borrow) before beginning an application. 

Business Loan Calculator

The lender will need to understand what the loan will be used for to give the green light for a bridging loan. You will also need to be able to provide security. This is usually the property you are purchasing or an existing property. You’ll also need to demonstrate a clear exit route for the bridging loan, that is, when and how the loan will be paid back at the end of the agreed term. 

Typically, this would be from the proceeds of the sale of a property, from money owed to you from customers, confirmation of a commercial mortgage, or refinancing. If you are selling a property to repay the bridging loan, for which a sale is outstanding, the lender will want to verify that the asking price is realistic.

Is a commercial bridge loan right for me?

As with all types of finance, it's essential to understand and weigh up the advantages and disadvantages to determine the right choice for your business.

Bridge loan benefits

Flexibility - Bridge loans give you flexibility when purchasing a property. You can choose from fixed or variable interest rates and open or closed loan terms.

Speed - You can get access to cash on short notice. Bridging loans can be ready in 24-48 hours — much quicker than many term loans. 

Higher limits - Because a bridge loan is secured against your assets, it's possible to borrow larger sums of money when compared to other types of financing.

Bridge loan disadvantages

Interest rates - Bridging loans are short-term, so they tend to come with higher interest rates. Interest on bridging finance is usually calculated monthly as opposed to annually. 

Fees - There are other costs, such as arrangement and exit fees.

Risk - As with other types of secured finance, your property - or other assets - will be at risk if you don't meet the loan repayments. 

How much does a commercial bridging loan cost?

The interest rates attached to bridge loans can be higher than traditional term loans, and interest is typically worked out monthly instead of annually. Depending on the lender, you may be able to arrange for the interest rates to be "rolled up" so that you pay them along with the loan amount at the end of the term. 

In addition, you can expect to pay a fee for the arrangement of the loan and administration fees. Like most loans, bridge loan interest rates can be fixed or variable. If the interest rate is fixed, it remains the same for the duration of the loan term so that monthly payments will be consistent. If variable, the interest rate can fluctuate. Usually, the lender will set the variable rate in line with the Bank of England base rate. 

Bear in mind that if you still need to pay off your mortgage, you can end up having to make both a mortgage payment and a bridge loan payment until your home is sold.

Although interest is the main cost, you should also consider:

Arrangement fees - Usually between 1-2% of your borrow.

Broker fees - Applicable if you use a broker to find bridging finance.

Exit fees - Some high street banks charge around 1% of the loan amount.

Types of bridge loans

A bridging loan can be taken out in two main options: open and closed loans. It is important to understand the type of bridge loan that you require for your business to fully understand how the loan works.

Open or closed  

An open bridge loan means there's no set date for paying off the loan, but you'll be expected to pay it off within a year. This type of loan may suit you if you've found a house you want to buy but haven't yet sold your current property.

In contrast, closed bridge loans have fixed repayment dates. This type of bridge loan may suit you if you're selling a property and are waiting to receive the money to put towards a new one.

First or second charge

If the property you're securing the loan against doesn't have any other loans secured against it, you'll get a first charge bridging loan. If, for instance, you already have a loan against the property in the form of a mortgage, your loan will be the second charge. 

Fixed or variable interest

Bridging loan interest rates can be fixed or variable. You'll know exactly how much you'll be charged with a fixed rate, and monthly repayments will be the same. While fixed rates tend to be more expensive, variable interest rates can change. 

How can I apply for a bridge loan?

You can use a lending platform like Funding Options to find a commercial bridging loan. The process is quick – you'll typically receive a decision within 24 hours. Just state how much you need to borrow and what it's for, and you can easily compare 120+ lenders to match your business with the right finance options for its needs.

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Vivek Seda

Vivek Seda

Asset Lending & Property Team Lead

Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.

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