by: Hassan Hosseini
Phd in Finance
Bridging loans are leveraged by individuals and companies who need to cover a gap in funding until they can secure long-term funding. It is most commonly associated with property purchases, and is often used to fund the following activities:
Buying a property at auction
Paying for renovations
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
If you’re looking to fund a property using a bridge loan, you might be able to borrow between £35,000 and £250 million. In most cases, you can borrow up to a loan-to-value (LTV) ratio of 75% of the value of the property.
Bridging loans can be used for other business purposes too. For instance, some businesses use bridge loans when they need a quick working capital boost. Other businesses use bridge finance to take advantage of time-sensitive inventory deals.
A startup might get a bridge loan when it's waiting for an equity financing round to close, and use the cash to fund operational costs such as payroll, inventory, rent, utilities, and any other business expenses they need to meet.
Bridge loan benefits:
Flexibility – you can choose from fixed or variable interest rates, and open or closed loan terms.
Speed – bridging loans can be ready in 24-48 hours – much quicker than many term loans.
Higher limits – because a bridge loan is secured against an asset, it's possible to borrow larger sums of money.
Bridge loan drawbacks:
Interest rates – bridging loans tend to have high interest which is calculated monthly as opposed to annually.
Fees – there are other costs to consider, such as arrangement and exit fees.
Risk – as with other types of secured finance, your property is at risk if you don't meet the repayments.
Types of bridge loans
Residential bridging loans
You can use a residential bridge loan when renovating or buying a residential property, or to purchase land to develop for residential purposes. Residential bridge loans are sometimes utilised when a property chain braids down or when a buyer wants to secure a property before the sale of their existing home goes through.
Commercial bridging loans
If you’re looking to buy or develop a property that will be used for commercial purposes (such as a shop, office, retail space, restaurant or gym), you might be eligible for a commercial bridge loan. You can use Funding Options to compare options and find a commercial bridging loan for your business today.
IPO bridging loans
You might use a bridging loan to fund your company’s Initial Public Offering (IPO). The IPO process is expensive, and bridging finance can act as a short-term funding solution to cover the costs. The loan can be repaid using the finance you raise from the IPO, and your underwriters can receive shares at a discount.
Open vs closed bridging loans
Closed bridge loans have fixed repayment dates. This may suit you if you're selling a property and are waiting to receive the money to put towards your new one.
An open bridge loan means there's no set date for paying off the loan, but you'll still be expected to pay it off within a year. This type of loan may suit you if you've found a property you want to buy but are yet to sell your current property.
First vs second charge bridging loans
If the property you're securing the loan against doesn't have any other finance secured against it, you'll get a first charge bridging loan. If you already have a loan against the property, such as a mortgage, you’ll get a second charge bridge loan.
Fixed vs variable interest bridging loans
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 might be more expensive, variable interest rates can change.
How much does a bridging loan cost?
Because they’re short-term, bridging loans are priced monthly as opposed to annually. Although interest is charged monthly, it is 'rolled up' and repaid at the end of the loan term alongside the principal loan amount and any fees and charges.
The equivalent annual percentage rate (APR) on bridging finance could be as high as 20%, which is much higher than many mortgages.
There are other fees associated with bridging finance. For example, you’ll have to pay an arrangement fee (typically 2% of the loan value), a drawdown fee and an exit fee. As with a mortgage, the lender will need to look at the market value of the property the loan is secured against, and you'll have to pay for the costs.
Who is eligible for a bridging loan?
To be eligible for a bridging loan you'll need to meet the lender's 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, such a commercial mortgage.
If you're using bridging finance for property, your exit strategy could be the proceeds of the sale. Or it might be funds owed to you from customers, confirmation of a commercial mortgage, or refinancing. Bear in mind that if you’re selling a property to repay the bridging loan the lender will want to verify that the asking price is realistic.
If you have a robust credit history, equity, or a way of paying off the loan and security, you could be eligible for a bridging loan – even if you have a poor credit rating – as long as your business is registered in England or Wales.
Are you ready to apply for bridging finance?
You can use Funding Options to find a commercial bridging loan today. The process is quick and you'll typically receive a decision within 24 hours. Tell us how much you need, what you’ll use the funding for and how quickly you need it, and we’ll compare 120+ lenders to match your business with the right finance options for its needs.
