Whether you’re seizing a sudden opportunity or facing a financing gap, a commercial bridging loan can be the key to unlocking additional funds.
This short-term financial solution offers the speed and flexibility that traditional loans lack. However, with higher costs and unique considerations, it’s important to understand how this type of loan works and how it could work for you.
In this guide, we take a look at commercial bridging loans, exploring their uses, benefits, drawbacks, and how to get one.
What is a Commercial Bridging Loan?
A commercial bridging loan is a short-term borrowing facility designed to help you seize opportunities in the commercial property market.
It’s a type of loan specifically secured against commercial property, such as offices, retail spaces, warehouses, or industrial units.
The primary purpose of a commercial bridging loan is to “bridge” the gap when you need to act quickly, whether that’s to purchase a new property before selling an existing one or to secure funding while you wait for long-term financing to be approved.
These loans are not limited to businesses alone.
Individuals, property developers, and investors can also leverage commercial bridging loans to achieve their property goals. The loan amounts can vary significantly, typically ranging from £50,000 to many millions, depending on the lender and the specific circumstances of the borrower.
One of the defining characteristics of any bridging loan is their short loan term.
Unlike traditional mortgages that can span decades, bridging loans are designed to be repaid within a relatively short timeframe, usually between 3 and 36 months. This makes them an ideal solution for situations where time is of the essence and a quick injection of capital is needed.
How much can you borrow?
The maximum LTV (loan to value) is 75% but 100% funding is available where additional security is available.
By working with the right lender, your loan can be secured over multiple properties.
Minimum loan size is around £50,000 and there is no maximum.
Who can borrow?
Loans are available to individuals, partnerships, limited companies inc SPV, offshore companies, trusts and pension funds.
How Does a Commercial Bridging Loan Work?
The process of obtaining a commercial bridging loan is designed to be swift and efficient. But there will always be some formalities to consider.
First off, by using a commercial mortgage broker you will have access to specialist banks and lenders. This should allow you to get a provisional “Yes” within 24 hours.
Following this, you’ll need to provide the lender with essential documentation, such as bank statements, business financials and accounts, details of the property you’re looking to purchase or refinance, and information about your intended exit strategy.
Once the initial checks have been completed the lender will need to send a surveyor to inspect the property and provide a valuation. It’s this valuation figure that your bridging loan will be based on.
Once you accept the lender’s offer, the funds are usually disbursed quickly, often within a few days, allowing you to proceed with your property transaction without delay.
Interest rates for commercial bridging loans are higher than those for traditional commercial mortgages due to the shorter loan term and the perceived higher risk associated with this type of financing.
When it comes to repayment, you typically have several options.
You can choose to make monthly interest payments throughout the loan term, opt for a rolled-up interest arrangement where the interest is added to the loan and repaid in full at the end, or choose a retained interest option where the interest is deducted from the loan amount upfront.
The Exit Strategy
A clearly defined exit strategy is an important component of any bridging loan application.
This is your plan for repaying the loan in full, when the term ends.
It’s important to have a solid exit strategy in place before applying for a commercial bridging loan.
Lenders will require detailed information about your plan, including timelines and supporting documentation. A well-thought-out repayment plan not only increases your chances of loan approval but also ensures a smooth and successful borrowing experience.
Common exit strategies include:
- Selling the financed property and using the proceeds to repay the loan.
- Refinancing the bridging loan with a commercial mortgage.
- Selling individual units within a developed property.
- Releasing equity from another property through remortgaging or a second charge loan.
- Selling or refinancing the business if the loan was used for business purposes.
- Using other sources of income or assets, such as savings or investments, to repay the loan.
You will find more useful information in our article: Successful strategies for repaying a bridging loan
What Can You Use a Commercial Bridging Loan For?
Commercial bridging loans are a versatile financial tool that can be used for a variety of purposes:
Property Purchases
Whether you’re looking to acquire offices, retail units, industrial premises, hotels, or even land, a commercial bridging loan can provide the funds you need to secure the property quickly.
This is particularly useful in competitive markets or when dealing with auction purchases where speed is essential.
Refinancing
If you have an existing commercial property with equity tied up in it, a bridge loan can help you release that capital for other investments or business ventures.
They can also be used to generate some extra funds to ease your cash-flow.
Renovations and Refurbishments
A commercial bridge can finance improvements, allowing you to enhance the value of a property before selling it or refinancing onto a long-term mortgage.
This can be a great way to maximise your return on investment.
Business Purposes
Beyond property transactions, bridging finance can be used for various business purposes.
This includes raising working capital, covering unexpected expenses, bridging cash flow gaps, or even financing the purchase of equipment or inventory.
Warehouses
Industrial
Manufacturing
Office
Retail
Pubs
Restaurants
Mixed-use
HMO
Land
Conversions
Factories
Hotels
Care homes
Advantages of Commercial Bridging Loans
Commercial bridging loans offer several advantages that make them an attractive option for those seeking fast and flexible financing:
Speed
One of the most significant is the speed at which these loans can be approved and funded. Unlike traditional commercial mortgages, which can take weeks or even months to process, bridging loans can often be completed within a matter of days. This makes them perfect for when time is of the essence, such as in property auctions or when a deal needs to be closed quickly.
Flexibility
Commercial bridging loans are more flexible than traditional loans. They can be tailored to your specific needs, with various repayment options available. This includes interest-only payments, rolled-up interest, or a combination of both. This flexibility allows you to manage your cash flow more effectively during the loan term.
Accessibility
These loans are accessible to a wider range of borrowers than traditional mortgages. Even if you have adverse credit or a complex financial situation, you may still be eligible for a commercial bridging loan. Lenders focus more on the value of the property being used as security and the viability of your exit strategy.
Opportunity
Commercial bridging loans open doors to time-sensitive investment opportunities that you might otherwise miss out on. Whether it’s a property that’s suddenly come on the market or a development project with a tight deadline, a bridging loan can provide the funds you need to act decisively.
Disadvantages of Commercial Bridging Loans
While these loans offer numerous benefits, it’s important to be aware of their potential drawbacks:
Cost
The most notable disadvantage is the cost. Bridging loans do have higher interest rates and fees than standard commercial mortgages. This is due to their short-term nature and the increased risk for lenders. It’s important to factor in these costs when considering your options.
Short Repayment Period
All bridging loans are designed to be short-term solutions, usually with a repayment period of 3 to 36 months. This means you need a clear and viable exit strategy to repay the loan within this timeframe. Failure to do so can lead to additional costs and potential financial difficulties.
Risk
As with any loan, there is a risk involved. If you’re unable to repay the loan according to the agreed terms, you could lose the property used as security.
Temporary Solution
Bridging loans are not a long-term financing solution. They are best suited for specific situations where you need quick access to capital for just a short period. If you require long-term funding, a commercial mortgage or other financing options will be more appropriate.
Is a Commercial Bridging Loan Right for You?
Commercial bridging loans are an extremely useful option but they’re not always suitable for every situation.
Do you require fast access to capital for a commercial property purchase, refinance, renovation, or other business purpose? If speed and flexibility are paramount, a bridging loan could be a good option.
Can your finances handle the higher interest rates and fees? Be realistic and ensure that funding is available to service the fees and payments.
Do you have a clear and viable repayment strategy? Whether it’s through the sale of a property or refinancing, a solid exit strategy is essential.
First and Second Charge Loans
Bridging loans can be set up as a “first charge” or “second charge.” These terms refer to the priority of the loan in relation to other debts secured against the same property.
First Charge Loans
If the commercial property you’re using as collateral doesn’t have any existing loans or mortgages on it, the bridging loan will be a first charge loan. In the event of default, the first charge lender is the first to be repaid from the sale of the property.
This scenario would happen if you used a bridging loan to buy a commercial property.
Second Charge Loans
If there’s already a loan or mortgage on the property, such as a commercial mortgage, the bridging loan will be a second charge loan. This means it has a lower priority than the existing debt. If you were to default, the first charge lender would be repaid first, and any remaining funds would go towards repaying the second charge loan.
Because of this, second charge loans have higher interest rates than first charge loans due to the increased risk for the lender. However, they can still be a useful option if you need to raise additional capital without refinancing your existing mortgage.
Using a Broker
While it’s possible to apply for a commercial bridging loan directly with a lender, using a specialist mortgage broker can offer significant advantages.
Brokers have in-depth knowledge of the commercial loan market and access to a wider range of lenders, including those not available to the public.
They will be able to identify the right kind of loan, seek out the best lender for your circumstances and help you with the paperwork and application process.
Fundamentally, a broker will offer you advice, expertise and access to the widest range of lenders.
Why choose a bridging loan?
Bridging loans come with upfront fees and higher interest rates, so why do people choose them?
In our experience, it is for one of two reasons:
Speed
It’s hard to find another type of finance that will lend 75% of a property value, for pretty much any reason, and do this within a week or two.
The primary advantage with a commercial bridge loan is that it can be arranged fast, and without too much fuss.
So if you are in need of a loan for just a few months a bridge is an ideal solution.
Choice (lack of)
Bridging finance is also a last resort for some borrowers, when they have been turned down elsewhere.
Most other types of loans are for longer terms, so the lender will want details of business accounts, personal accounts, tax returns etc. If you fail the financial assessment the loan will be refused.
Although bridging lenders are mindful of your financial situation, their primary interest is in the security (the commercial property) and the exit strategy (how you pay them back).
If these both tick the boxes then you’re good to go.
For a lender, a bridging loan is about lending fast and getting repaid within the loan term. They have no interest in having your loan on their books for 10 or 15 years.
So bridging loans are more expensive, but they provide fast access to funds and can be used in a wider variety of situations.
Bridging Loans Guide
In this guide, we will provide an overview of bridging loans and offer some tips on how to get the best deal when looking for short term finance.
Bridging Loans
Bridging loans are a popular way to raise finance quickly and easily for a variety of purposes, including buying a new property before selling your old one, carrying out refurbishments, or even raising working capital for a business.
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