Bridging loans are a form of interim short-term loan commonly used to support a business or individual before permanent financing can be arranged. They offer an immediate source of cash flow and money that can be used to keep the business afloat or secure property, generally for a period of up to one year.
Also known as interim financing, bridging loans come with higher interest rates than conventional finance and usually require collateral as security.
How do Businesses use Bridging Loans?
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.
Pros and Cons of Bridge Loans
- 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) mortages aren’t available
- Higher Cost and Interest Rates
- Long Term Finance is needed to pay off the Bridging Loan
What are the Costs or Rates of a Bridge Loan?
As one would expect from a short-term loan, the costs of bridge loans can be higher than some other forms of 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.
Bridge Loans for Real Estate
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.