If you’re looking for a business loan, it’s safe to say that there are plenty of options out there for you – but which will bring you the most value and solve your specific issues? Well, if you’re considering bridging finance, you’ve come to the right place. Welcome to Bridging Loans Explained!
What is a bridging loan and what are the potential benefits for your business? In this guide, our bridging finance experts will cover everything you need to know about bridging loans, from how you might use one to how to apply. Get advice on bridging loan pros and cons, how much it will cost, and more. If you require more personalised advice, don’t hesitate to get in touch directly.
What is a Bridging Loan?
Bridging loans are, by definition, a financial product used to help small businesses access quick cash in a short-term contract. They essentially help to bridge the gap between a debt and a future influx of cash, meaning business owners can go about their usual operations without being limited by a need for a last minute cash injection. Most commonly, a business bridging loan will be used for buying or renovating property, but this type of financing can also be used for a number of other purposes, depending on the agreed loan terms.
How Does a Bridge Loan Work?
If your business can’t access a traditional loan to cover the purchasing of an asset, a short-term bridging loan can help. Highly flexible, they can help you fund an asset in the short-term before a better loan is accessible.
Once in touch with a bridging lender, you could see a decision in principle within just 48 hours. This gives those who need it a fast method for obtaining high value loans. Once you have secured the asset, you can then take out a loan with better rates and repay the bridging loan.
Bridging finance helps businesses avoid the tight restrictions and long-winded process of applying for a mortgage. That’s why they’re most popular with property related companies, as a property may become available which needs to be snapped up fast. If the seller needs the deal completed within a short period of time, most mortgages will take too long to administer. Instead, a business bridging loan for a house purchase will provide you with the cash you need until the mortgage application has gone through.
What is Bridging Finance Used For?
Bridging loans can have a number of purposes, but are more commonly used in property, for example light property refurbishments. They can also be used for buying properties at auction or maintaining a place within a property sale chain. Bridging loans can also help to solve short term cash flow problems for businesses, or for making quick tax payments. See the examples below for more information.
Bridge Loan Financing Examples
Bridging loans for property refurbishment: Refurbishment bridging loans are commonly used among property development firms and are a short-term solution for funding shortfall. Properties in need of heavy refurbishments are often deemed unsuitable for mortgages, and therefore work needs to be done at a heavy price before the property can be sold on. With a bridging loan, a developer could secure significant funds to use on the refurbishment of the property, allowing them to sell the property for a higher price, repay the lender, and still have profit to spare.
Bridging loans for property purchases: In the property sector, there is fairly often a sale chain to consider. Some people get trapped in this chain and are unable to make significant purchases until a sale has been made at the other end. In these scenarios, a bridging loan can help to close the gap and keep the chain moving. Once the sale is completed, those funds are then used to repay the loan.
Bridge loans can also be used for ‘bargain’ property purchases where sales need to be completed quickly. The loan is secured against the available equity in property and then repaid upon resale.
Types of Bridging Finance
There are various subtypes of bridging finance that you should be aware of if you are soon to make an application. Each type will have a slightly different criteria and may cost more or less depending on security and term.
- Closed and open bridge loans
Whether a bridge loan is ‘closed’ or ‘open’ refers to the agreed repayment time. When an application for a loan is being processed, the lender and borrower will agree to the terms of repayment. If the loan is ‘closed’, this means there will be a set date by which the loan must be repaid. This is usually set for a few months after the money is loaned. An ‘open’ bridge loan means there is no set repayment date, which can be useful if the borrower doesn’t know exactly when they will need to access the finance.
Due to the uncertainty of an open bridge loan, interest rates can be slightly higher. A closed bridge loan offers more security for the lender and is therefore easier to access.
- First and second charge bridging loans
First and second charge loans refer to the status of the asset that is being secured upon. For example with property, if the asset is fully owned by the borrower and has no other encumbrance, then a bridging loan is first charge (i.e. the first charge on the property). However, if the borrower is already paying a mortgage on the property, then the loan is referred to as ‘second charge’.
What are the Pros and Cons of Bridging Loans?
Bridging loans are fast, flexible and can bring a number of opportunities to a business, but as well as the benefits, there are also some risks that business owners should be aware of before making an application. Below, we break down the benefits and cons of bridge loans.
Bridging Loans Benefits
- Vast potential: A business bridging loan is not limited to one purpose. While they are commonly used in the property sector as a mortgage shortcut, bridging finance can also be suitable for an array of other purposes depending on what is agreed with your lender.
- Transaction speed: With bridging finance, you can access funds faster than with most other loans. It is a fantastic option for emergency situations, but can also help with short-term projects or times when your business is simply waiting for a promised cash influx.
- Controlled interest: Since bridging loans are short-term, the interest is more controlled than with some other funding options. Having to repay within a relatively short timeframe will mean you have complete oversight and can budget your repayments more easily.
Bridging Loans Cons
- Reclaim: One of the biggest risks of using a bridging loan is the fact you may not be accepted for a secured loan once you’ve financed your asset. This puts your business at risk, as there is a chance that assets and properties could be reclaimed to make your payments. If you haven’t considered how you will exit your commercial bridging loan, it’s recommended to get assurances beforehand.
How Much Does a Bridge Loan Cost?
How much you will be charged for a bridging loan depends on a number of things, from your credit score and current interest rates to the value of what you have secured against. All costs (such as the arrangement fees and interest) are deducted from your loan when you receive your money. They can also be added, depending on your preference. These fees typically include:
- An arrangement fee of 2%
- Interest from 0.55% per month to 1.5% per month
If you have a poor credit rating, don’t worry – many people seek a bridging loan due to having gone over term on their financial commitments, and as a result have adverse credit. A bridging loan can be a good tool to help alleviate this financial pressure and allow clients the time and flexibility to return to a stable footing again and improve their credit.
What Are the Interest Rates on Bridging Loans?
As will all business loans, the interest rates are extremely variable depending on the type of loan, the terms, and any security. Rates are usually assessed on a case-by-case basis, and it is advised that you speak with a professional before agreeing to anything you are unsure about. Typically, the interest rate on a bridging loan will range from around 0.4% to 1.5%, monthly. The location and condition of the property will impact the interest rates you pay.
Bridging loan terms are usually between 3-6 months, but depending on individual circumstances, can be up to 36 months. Of course, the longer you are borrowing for, the more you will pay overall.
With bridging loans, you can typically opt to service the interest monthly, or you can pay the interest back at the end of the loan. Please note that the interest rate is a fixed figure displayed monthly. It does not compound, it does not fluctuate, and it is not variable.
Note that you may also be charged a product fee (an arrangement fee) which is often worked out at around 2% of the amount you are borrowing. Valuation fees may also be applicable if you are securing on a property. The property will need to be inspected to check its condition and value.
Is a Bridging Loan Right for Me?
There are many factors to consider when deciding whether a bridging loan is right for you, and it is important to also consider other types of loans depending on your circumstance.
The value of the property will be a significant factor when it comes to deciding whether or not to apply for a bridging loan as this is how the amount you can borrow is determined, as well as the interest you will pay. We recommend considering the below when you are thinking about how valuable a bridge loan might be for you:
- Loan to value (LTV): The size of the loan in comparison to the property value. The lender will decide this ratio based on the property value, but not necessarily the purchase value.
- Gross development value (GDV): This is calculated based on the predicted value of the property after any refurbishments are completed.
For some, bridging loans are the only option, but they can be risky. Consider your alternatives and the specifics of your project before you start an application.
Can I Get a Bridging Loan?
All types of businesses that have either a commercial or residential property to secure on can get a bridging loan. When applying for a bridge loan, you will often be asked to provide specific documentation as well as a detailed plan as to how you will be spending funds and the desired outcome of the project. This will help the lender to assess your situation and determine whether a loan can be equally valuable for them as it is for you. If your project includes excessive risk, you may not be accepted.
Below is a list of the security we lend against with bridging finance at Aurora Capital:
- Residential property
- Residential developments
- Commercial property
- Commercial developments
- Mixed-use property schemes
- Offices
- Retail
- Land, farms and agricultural
- Investment property – residential and commercial
- Auction
Are There Any Risks With Bridging Loan Financing?
As mentioned, there are some significant risks when it comes to bridge loans, and businesses should seek support from an advisor before starting an application. Risk is mostly due to the high rates that bridge loans are known for. Since the conditions of your loan depend on the outcome of a project, it can be difficult to calculate what you will be able to repay. Therefore, lenders will typically offer higher rates to protect themselves.
While bridge finance can be a powerful tool and provide you with the valuable assistance you need, they can also leave businesses in debt. For example, if your project falls through or encounters any significant hurdles, you may be faced with other charges and be unable to repay your loan.
Alternatives to Bridging Finance
Before applying for a bridging loan, it is worth checking whether you can remortgage the property and withdraw the funds you need from equity. If this is not possible, or you need to secure the finance as quickly as possible, you can also try a traditional business loan that is either secured or unsecured. Some businesses considering bridging finance also opt for let-to-buy loans if they feel a bridge loan is too risky.
If you would like some more personalised advice on what kind of loan might be right for you, you can always speak to our professional advisors.
Who Offers These Types of Loans?
If you’re looking for the best value bridging loan, it is worth considering both banks and private lenders. Each will have varying terms and rates, so before making any decisions it is important to do your research.
While not all high street banks offer bridging loans, advisors may be able to point you in the right direction. However, your best option is to approach a private lender with specific bridging loan expertise. At Aurora Capital, we have access to a large pool of quality lenders who will be able to help you get the best possible outcome from your loan. We can match you with a lender based on your specific needs.
How to Find the Best Bridging Finance Company Lenders?
Finding the best lender for you is made quick, painless and simple with Aurora Capital. We work with hundreds of lenders offering bridging finance, and our experts will be able to explain any confusing terms in a way that is completely accessible. Simply head to our bridging loans page to learn more about the process and apply.
How Can I Apply for a Bridge Loan?
Looking to start the application process for a bridging loan? For the fastest and most streamlined process, choose Aurora Capital.
When starting your application, you will be asked to provide an overview of your project and your reasoning for needing the funds. You may also need to provide some additional details and documentation, such as proof of identity, bank statements or business information. We will then match you with a lender, who will assess your circumstances and determine whether or not you qualify for the loan. At this stage, the lender may require additional information about the property – there may be valuation assessments that have to be scheduled, and some clarification required in terms of the purpose of your loan (for example, you will need to demonstrate what you will be using the loan for and your desired outcome). You may also need to present an exit strategy, which is information about how you plan to repay the loan.
Once you are accepted for the loan, you can receive your funds in a matter of days and get started on your project!
If you need any further support or information about bridging loans, or other types of business loan that might be better suited for you, don’t hesitate to contact our experts here at Aurora Capital. We’re always happy to support you in any way we can.