Bridging Finance Guide
A guide to taking out a bridging loan
Bridging finance is a form of short-term loan available to businesses and is designed to act as temporary finance to ‘bridge’ the gap. A bridging loan is ideal for a short-term solution and will move your business along while waiting for income, or an alternative more permanent form of finance. We have produced this guide to help you understand more about bridging loans and whether they could be a suitable loan for your business.
What is the difference between a bridging loan and a standard business loan?
The main difference is that bridging loans are designed with a specific short-term goal in mind, whereas a standard business loan is a more long-term solution for the overall continuation of the business. However, most businesses will take out a bridging loan because the funds are available very quickly, often in as little as 24 hours.
What can a bridging loan be used for?
As the loan is considered a form of finance for property development, the majority of lenders will offer bridging loans for the renovation or build of a property. This can be both residential and commercial property, ranging from small scale renovations to the building of a complete development. Although, a bridging loan can be used for any commercial purpose, as long as you can prove to the lender that there is a clear exit plan.
The majority of property developers use bridging loans to finance the complete build of the property, as they provide instant access to the funds needed to complete any building work. The loan is then repaid on the agreed exit date when the property is sold, or the bridging loan is converted into a mortgage.
Bridging loans are also used to complete smaller scale renovations, as their speed allows developers to start work immediately. For example, a developer may use a bridging loan to renovate a property to a level where it is mortgageable. Not all properties are eligible for mortgages, but bridging loans can provide the finance required to prepare a property for a standard full-term mortgage.
It is also common for buyers to use bridging loans when purchasing a property at auction, instead of traditional mortgage providers. Most auction houses will only provide 28 days for the buyer to pay for the property, which makes the speed and availability of a bridging loan an ideal solution.
What are the risks of taking out a bridging loan?
A bridging loan can be made to an individual or a company and is likely to be secured against either commercial or residential property. This means that if the loan is not repaid the property will be at risk, in exactly the same way as a standard mortgage.
To avoid this risk, it is essential to have a clear exit strategy in place either by selling or mortgaging the property. If the loan is not repaid on the planned exit date you will be subject to initial charges and high interest rates, which will eventually move to repossession of the property if the bridging loan is still unpaid.
When taking out a bridging loan what does the term ‘exit’ mean?
As you research bridging loans you are likely to come across the term ‘exit’, which is the lenders way of establishing how you are going to repay the bridging loan in full. If you have no specific exit plan in place, they will want to know what other forms of finance you are planning, such as a more permanent fixed term mortgage.
A closed bridging loan will have a fixed exit date already established, whereas open bridging loans are offered with the terms set to a last possible repayment date. If the sale of a property has already been agreed, a closed bridging loan is likely to be offered but if the date of completion or scale of renovations are unclear the lender will offer an open bridging loan.
What are the interest rates and charges for bridging loans?
As a bridging loan is a specialist form of finance, the interest rates and any charges are likely to be higher than traditional lending streams. Many borrowers will combine their interest payments into one fixed sum to pay on the exit date, rather than monthly repayments. This is an ideal way to manage the repayment of charges, if funds are not available during any renovation or building works.
The interest rate is likely to be based on the risks associated with your project, however the rates currently offered vary between 0.5-1.5% per month for low risk developments. In many situations there will also be fees and administration charges for arranging and managing the bridging loan. The most common fees are arrangement fees, exits charges, legal fees and a surveyor’s charge, which can be a fixed amount or charged as a percentage of the loan amount.
These charges will vary between lenders, although our team will always be able to help you compare fees and the associated terms and conditions.
How do I apply for a bridging loan?
There are a range of lenders which specialise in providing bridging loans to businesses, with the majority asking the same key questions as part of the application process. The first thing they will want to understand is how much you want to borrow, when you need it by and when you plan to repay the bridging loan.
Once they have established these clear figures, they will decide how feasible the loan is based on the kind of development work you are completing, whether you already own the site and if you have successfully arranged planning permission. They will then finalise their decision based on factors such as your own experience and the current level of work completed.
If you have the required information ready during the application, it will speed up the lending process. The aim is to show that your development is very likely to be completed on schedule and that you have the skills and expertise to manage the build.
Compare bridging loans
As specialists in business finance we work with a variety of lenders who provide a range of business loans, including bridging loans. Our useful comparison tool is designed to ask you a series of quick questions, so that you can find the ideal bridging loan for your business. You will be presented with the ideal lenders for your individual bridging loan requirements, based on factors such as the loan term, interest rate, charges and speed of payment.
Most lenders will be able to release the funds within 72 hours, although depending on your individual circumstances this can take a few weeks. Our panel of lenders can provide bridging loans with terms from just one day to a maximum of 12 months, with loan amounts generally starting at around £25,000.
Our lenders are carefully selected based on their flexibility, speed and competitive terms and include everything from alternative peer to peer lending streams to traditional high street banks. By choosing one of our lenders for your bridging loan, you will have the reassurance of borrowing from one the UK’s most reliable and competitive lenders.
To find out more about our lenders and the bridging loans they could offer your business, please contact our knowledgeable team today.