Bridging Finance
Bridging loans are fast, flexible, short-term funding solutions, secured on the property asset. They are loans to ‘bridge’ the gap whilst other longer-term finance is arranged. Can be used for purchases, refinancing, auctions, refurbishment and development funding for a huge range of property types and sizes. Facilities available to owners, developers and investors.
Main Features
Bridging loans have some distinct features compared to other secured business loans namely;
How does a bridging loan work?
Bridging loans work like other secured business loans – the amount available to borrow depends on the value of the asset used as security. Borrowing can be against a variety of assets such as property, machinery, a piece of land, but higher value assets are more common.
The most important thing is to have an exit strategy – this proves to lenders that the loan can be repaid in full or the loan can be moved into a longer-term type of finance, such as a mortgage.
Although bridging finance can help the borrower access cash quickly, this type of funding comes at a higher rate of interest.
Term of bridging loans
Loan terms can last anywhere between one month to three years, but most lenders won’t offer bridging loans for longer than 12-18-month terms.
Different types of bridging loans
Bridging loans like other lending products vary with regard to repayment terms and interest rates. It is important to be aware of the different types of loans and their suitability, namely;
Open bridge loans
These don’t have fixed repayment dates, but will generally require repayment within 12 months.
Closed bridge loans
There is a defined exit strategy in place from the outset. Here, the lender will know how, what date and through what method the bridger is to be repaid. Often, this will involve a confirmed sale of a property, but can include other methods.
Fixed rate or variable rate
Bridging loans can have fixed or variable interest rates.
First and second charge loans
A bridging loan is a secured loan meaning the loan has collateral behind it (for instance a property or large value asset) which is subject to a ‘charge’ by the lender. This means that in the event of non repayment of the loan, the lender can recover their funds from the sale of the collateral.
Where there are no pre-existing loans tied to the collateral sercurity (such as mortgages on a property i.e. where it is owned outright), this is known as a ‘first charge’ bridging loan. Consequently, if the loan was unable to be repaid the property would be sold to settle the debt and the bridging loan lender would be the first in line to receive their repayment.
Where there are one or more existing loans already secured against the property, like a mortgage, it becomes a ‘second charge’ bridging loan. In this situation, in the event of default, the bridging loan lender would receive their repayment only after the the first charge holder (mortgage provider in this example) has received theirs. They can also be known as “senior” and “junior” bridging loans, with the “senior lender” being the one who’s repaid first.
Typically, second charge loans come with higher costs, reflecting the increased risk for the second charge lender in recovering their funds if there are difficulties with repayments. Additionally obtaining a second charge loan requires consent from the first charge lender.
Advantages & Disadvantages
There are a number of considerations to be borne in mind before choosing Commercial Bridging Finance, both positive and negative, and whether it is the right fit, or product for your business.
Advantages
- Speed – an important advantage of bridging finance is its speed, especially when compared to traditional mortgage options. While traditional options may take months to process, bridging loans can be approved and funded within a matter of weeks. It can, for instance allow developers to grab a good deal, like when a prime site is reduced for a quick sale.
- Flexibility – Bridging loans are also very flexible, making them useful for different situations ; buying a new commercial property, for brownfield sites or run-down commercial premises that might not be eligible for traditional mortgages, providing a business with working capital or even funding tax liabilities.
- Unregulated – meaning less bureaucracy to get through.
- Temporary financing – When you anticipate a short-term financial need—like awaiting the sale of another property to fund a purchase—bridging finance provides temporary financing for up to 12-18 months. This short-term nature contrasts with the long-term commitment of a commercial mortgage.
- Upfront costs minimal – There will be a relatively small upfront cost/fee for a major asset purchase.
Disadvantages
- Higher borrowing costs – (in relation to other types of business borrowing) is the main disadvantage of bridging facilities. Whilst they are a quick and short term finance arrangement, lenders will tend to charge accordingly. Borrowers do have options for repaying the interest, including monthly or rolled up (repaid at the end of the loan), which can aid cashflow.
- Temporary financing – whilst also an advantage, it can be a challenge in some cases. If long-term financing cannot be sourced in time, or a bridge extension secured, or if an exit sale achieved, a difficult financial situation may result. A clear exit strategy is paramount.
- Unregulated – again whilist this is an advantage to obtaining faster funding, the unregulated nature of this form of finance means that, unlike a regulated bridging loan by the Financial Conduct Authority gives borrowers protection if they are sold an unsuitable product or given incorrect advice from lenders or brokers. Compensation is possible when eligible. Unregulated finance offers none of this protection.
FAQ’s
How much can you borrow?
With commercial bridging loans, the amount you can borrow depends on the value of the security offered, which is why more valuable items such as property and land are usually offered. Most lenders will offer up to a maximum of 70% LTV (loan to value) so a property valued at £1 million would allow a bridging facility of up to £700,000.
Is a valuation required?
As bridging loans are a secured form of finance, and the value of the security is used in order to borrow money for refurbishments, development or to purchase another property, an accurate and up to date valuation therefore is very important, and will be required.
What type of businesses are eligible?
Commercial bridging loans are available to an individual, partnership or company if they are the owners or the intended purchasers of a property that is considered suitable security by a lender.
Next Steps
There are a large number of bridging lenders across the UK and and given Snowball’s unique position as an independent broker we have access to a great deal of them.
Snowball will oversee the process, to take ownership of the relationship between borrower, solicitor, lender and other professionals involved ensuring a smooth journey to completion.
For an initial no obligation call or meeting, please contact us to arrange.