Bridging loans are a form of short-term funding. Commonly used to support a business or individual; the intention is to ‘bridge the gap’ between a debt falling due, and the main line of credit becoming available.
Bridging loans offer an immediate source of cash-flow and money that can be used to keep a business afloat, or secure property. They come with higher interest rates than conventional finance and usually require collateral as security.
Generally, the length of term for this type of interim funding can be from a couple of weeks, and up to three years, depending on the arrangement for longer-term financing, with the loan being repayable in full by the end of the term.
They can also be referred to as “caveat loans” or “swing loans”, however, in the UK they are usually just called bridging loans.
Who are Commercial Bridging Loans Aimed at?
Commercial bridge loans are commonly used as a source of immediate finance.
For businesses engaged in equity financing for example (raising capital via the sale of shares) there may be the need for working capital during the months it takes for the process to unfold.
This working capital, provided by the bridge loan, allows the company to make payroll and cover the ongoing costs of running the business. Once the equity financing is secured the bridge loan is paid off immediately.
When Should You Use Bridging Finance?
Increasingly, bridging loans are being used as just another form of alternative finance and alternative to mainstream lending. They are most commonly used by property investors in order to secure a property while waiting for another one to sell.
Because of their relatively high rates of interest, they should ideally be used by businesses with a secure financial situation, and with a clear exit strategy for paying the loan off within an agreed period of time.
You should also do your due diligence when it comes to understanding any fees that may be applicable – some lenders are less scrupulous than others and, for smaller businesses, these can sting.
- They are short term, and designed to be repaid in full as soon as the long-term financing arrives
- Borrowers have some control over repayment options
- Can improve credit score if repayments are made on time
- Loans are faster to arrange than longer term finance
- Can offer greater buying power since it means you become a cash buyer
- They offer a solution when high loan-to-value (LTV) mortgages aren’t available
- Higher Cost and Interest Rates
- Long Term Finance is needed to pay off the Bridging Loan
- Commercial bridging is unregulated, so you need to be watchful for hidden fees and charges.
How Much Does Bridging Finance Cost?
As one would expect from a short-term loan, the costs of bridge loans can be higher than some other forms of finance. Interest rates are charged monthly, as per the short term nature of the finance.
Arrangement fees average at around 1% of the sum borrowed, plus a fee of between 0.3 and 1% monthly. There are often exit fees of around 1% in addition.
How Long Can You Have a Bridging Loan For?
These are short term loans by definition, intended to bridge the gap between two situations. As such, they are offered for periods of between 24 hours and 1 year.
In exceptional cases, bridging loans may be extended to upwards of 18 months.
Can You Get 100% Bridging Finance?
While most lenders do have an LTV (loan to value) cap, certain providers do specialise in offering a 100% LTV loan.
This means that, as opposed to the customary 80% maximum, a bridging loan might cover the full value of the property you want to secure.
Providers who do offer this do so only where they have cast-iron security in place, which may include either several properties or another asset entirely.
In keeping with the higher risk, 100% LTV bridging finance often comes with higher fees.
How Long Does it Take?
Arranging the loan itself is extremely fast, sometimes a matter of hours.
Actually receiving the money takes longer, however, because there are property valuations to arrange in most cases, as well as credit checks.
A more realistic timeframe would be 3 to 4 weeks. Commercial bridging finance is actually faster than that for individuals as it is currently unregulated.
Bridging Loans for Real Estate / Property Development
Bridge Loans are most commonly used in the property sector, both in the residential and commercial side, to help unlock property chains.
They’re a useful means of securing a property quickly, preventing foreclosure, or seizing a great opportunity before long term financing has been arranged. They are utilised by both home buyers and commercial property investors.
To find out how we can help you gain access to bridging finance please contact us and we will be happy to advise you on your options at no cost.
Is it Regulated by the FCA?
While personal bridging loans are regulated by the Financial Conduct Authority, commercial loans secured against investment properties are not.
Unregulated loans include first charge loans on commercial or investment property, or a second charge loan that is placed on the borrowers loan, though used for investment purposes.
What is a Second Charge Bridging Loan?
‘Second charge’ is where a property which already has a mortgage on it, is used as collateral for a bridging loan.
Second charge loans are generally used for improvements to an existing property such as a loft conversion or extension. Since the borrower will have to pay off any early repayment charges from the mortgage, these can represent a saving over traditional bridging loans.
What is the Interest Rate for Commercial Bridging Loans?
Bridging Loan rates are generally far higher than any commercial mortgage, larger to offset the risks by lenders. The rates vary widely but here is an example:
- Amount of Loan: £500,000
- Duration: 12 months
- Security: 1 x Property valued at £500,000
- Mortgage Balance: £400,000
- Interest Rate = 0.75% or £3,778 per month.