Welcome to our guide on commercial bridging loans. In this guide, you’ll discover how this type of financing works, its potential uses, and tips on securing the best deal available.
What is a commercial bridging loan?
A commercial bridging loan is a form of short-term finance primarily used for investing in commercial property. Common applications include purchasing investment properties, funding development projects, or acquiring premises for owner-occupier use by you or your business.
These loans are typically offered on an interest-only basis and are unregulated, allowing lenders to operate with greater flexibility without oversight from the Financial Conduct Authority (FCA).
Bridging finance is particularly beneficial when quick access to funds is required for a property investment, especially in situations where traditional mortgage options are not feasible within the necessary timeframe.
How do they work?
Bridging finance for businesses is a type of secured loan, meaning the lender will require a charge to be placed on a property involved in the transaction. These loans typically feature high interest rates and short terms, generally lasting no longer than 12 months.
To repay the loan, you will need an approved exit strategy, which the lender must agree upon in advance. Common exit strategies include selling the property for a profit or refinancing onto a commercial investment or owner-occupier mortgage.
Commercial bridging finance could be an option if you:
Are buying a commercial property at auction
Want to develop an ‘unmortgageable’ property
Need funds for a quick non-residential refurbishment job
Aren’t eligible for a commercial mortgage in the short term
One of the key advantages of bridging finance for commercial property investors is its flexibility. It can be used in nearly any transaction involving business property where there is a short-term gap between a debt and a primary line of credit.
Beyond property transactions, businesses can also benefit from bridging loans in various scenarios, including:
- Acquisitions and Pre-Development: Funding the purchase of land or preparatory stages of a development project.
- Covering Short-Term Trading Gaps: Providing liquidity to manage temporary dips in revenue.
- Stock Acquisition: Enabling the purchase of large quantities of inventory at advantageous prices.
- Asset Investment: Financing the acquisition of essential business assets, such as machinery or equipment.
These versatile loans offer a practical solution for businesses needing swift access to capital for time-sensitive opportunities.
Eligibility criteria
The eligibility criteria for commercial bridging finance is as follow:
- Exit strategy: Your chances of approval will hinge on how strong your exit strategy is. It will most commonly be the sale of the property or a remortgage onto a long-term commercial agreement, so you will need evidence that either is probable.
- Deposit requirements: You will need around 25% of the property’s value to put down as a deposit, but 100% commercial bridging loans are available for borrowers with additional security, such as property/assets the debt can be secured against.
- Experience in property: Your bridging finance lender is more likely to be convinced that your plans are achievable if you have experience and a track record in commercial property. There are, however, some options for new investors.
- Business plan: Depending on the purpose of the funds, some lenders might request a business plan. For example, if the funds are to help your firm through a trading lull, they may want to see a roadmap detailing when profits will normalise.
- Credit history: As commercial bridging finance is unregulated, lenders can be flexible with their credit history requirements. If, however, you or your business has credit problems that put the exit strategy at risk, approval can be more difficult.
Commercial bridging loans are accessible to a wide range of borrowers, including individuals, business partnerships, small and medium-sized enterprises (SMEs), limited companies, and large corporations.
How to get a commercial bridging loan
Your first step should be to consult a broker who specialises in commercial bridging loans. This type of finance offers significant flexibility and can be a crucial solution when timing is critical. However, it comes with high interest rates and inherent risks, making expert guidance essential.
A qualifed bridging finance broker can provide bespoke advice, ensure you fully understand the risks, and help you secure the best deal available. They offer the following services:
- Access to all commercial bridging lenders on the market.
- Comparison of deals on your behalf, including broker-exclusive offers.
- Tailored advice on your options and your exit strategy.
- Step-by-step guidance throughout the application process.
- Continued support, including assistance with securing a commercial mortgage if needed after the bridging loan.
With the right expertise, you can confidently navigate the complexities of commercial bridging finance.
Available lenders and interest rates
Most bridging loan lenders are unregulated, allowing them to provide flexible financing options tailored to business purposes. Some examples of providers include:
- Together
- Roma Finance
- West One Loans
- Glenhawk
These are just a few of the available lenders. To ensure you secure the best deal, it’s advisable to work with a brokers, who can explore the entire market on your behalf. Approaching a single lender directly restricts you to their specific product range, which may not be the most competitive option.
Commercial bridging finance often comes with higher interest rates compared to longer-term options like mortgages. Rates are typically quoted with daily interest charges, which accumulate over time. Repayment of these charges can be structured either monthly or at the end of the loan term, depending on the agreement.
With the right guidance, you can navigate the complexities of bridging finance and find a solution that aligns with your business needs.
Things to consider
Maximum Borrowing Caps
Business bridging loans often have flexible maximum amounts, with lenders assessing cases individually.
Some lenders impose borrowing caps ranging from £2 million to £10 million.
Many providers enforce loan-to-value (LTV) limits, typically capping loans at 75% of the value of the secured property or asset.
Borrowing beyond this limit may be possible by offering additional security, such as another property or asset with sufficient equity.
Second Charge Lending
Bridging loans can be secured as second charge debt, meaning they are placed behind an existing mortgage or loan secured on the property.
In such cases, the mortgage or loan is the first charge debt, while the bridging loan takes second priority for repayment if the property or asset is repossessed and sold.
Exploring Alternatives
A commercial bridging loan is one of several finance options for businesses. Depending on your needs, other solutions might be more suitable.
Alternatives include:
- Refurbishment Loans: For property improvements or development.
- Asset Finance: To fund equipment or machinery purchases.
- Remortgaging a Commercial Property: To release equity.
- Business Loans: For general funding requirements.
To ensure you select the best option, discuss these possibilities with your broker, who can guide you through the pros and cons of each type of finance.
Frequently Asked Questions
Commercial bridging loans are unregulated, meaning they do not fall under the oversight of the Financial Conduct Authority (FCA). While this means your transaction will not be protected in the same way as regulated finance, it does not imply that commercial bridging loans are unsafe.
Several reputable organisations work to uphold standards within this sector of the market, such as: FIBA, NACFB, IMLA, ASTL. These bodies promote best practices and maintain industry integrity, providing an additional layer of trustworthiness.
Bridging finance brokers also adhere to the highest professional standards. They are committed to transparency, offering clear details about all associated costs and potential risks. Their guidance ensures you fully understand the process and can make informed decisions confidently. By working with experienced brokers and reputable lenders, you can mitigate risks and take advantage of the flexibility bridging finance offers, even in an unregulated market.