What is a commercial bridging loan and how do I get one?
Are you looking for short term finance for your business? If so then a commercial bridging loan might be suitable. Commercial bridging loans are often used when there is a timing gap between buying one property and selling another. But they can also be used for other types of short-term business finance.
In this guide we explain how bridging loans work, the pros and cons and how to apply. We also answer common questions like “how much can I borrow?” and “what happens if I can’t repay the loan?” Let’s take a look in more detail.
Table of Contents
- What is a bridging loan?
- What are the pros & cons of a bridging loan?
- How do I apply for a bridging loan?
- Frequently asked questions?
What is a commercial bridging loan?
A commercial bridging loan is a type of short-term business loan, usually due for repayment in 12-24 months. It can be a great solution for funding a timing gap where your business is waiting for cash to come in. Commercial bridging loans are also sometimes known as “swing loans”, “interim finance” or “gap financing”.
Commercial bridging loans are often used by businesses buying a new property before another one is sold. Lenders also offer bridging loans to help with other short-term cash needs including expanding your business, settling a tax bill or renovating a property.
How does a commercial bridging loan work?
How commercial bridging loans work depends on the type of bridging loan and the terms of your agreement.
Once your business has been accepted for a bridging loan your agreement will set out the following:
- Any charge on your property or asset - if your property is already mortgaged then the lender may require a second charge.
- Interest rates and arrangement fees - these may be higher than a traditional business loan.
- When interest payments are due - some bridging loans roll up the interest, whereas others require payment each month.
- When the loan needs to be repaid - closed bridging loans agreements include a final repayment date for your loan. In contrast, open bridging loans don’t include a set final repayment date.
What can I use a commercial bridging business loan for?
Bridging loans are often used to fund property purchases but they can be used for other types of short-term finance needs. Here are some of the common uses for a commercial bridging loan:
- Buying a development property - developers often use bridging loans to finance buying new land or premises.
- Renovating a development property - developers also use bridging loans to renovate a property ready for sale.
- Buying a business premises - your business may need to bridge a gap between buying one premises and selling another.
- Waiting for a mortgage - bridging loans can provide short-term finance if your business needs to buy a property before a mortgage is agreed.
- Agricultural clients - farmers may use a bridging loan to purchase land quickly or to fund diversifying their business.
- Tax or other unexpected bill - bridging loans can be used to pay a Corporation Tax or VAT tax bill.
Types of commercial bridging loan
Lenders offer various types of bridging loans for different circumstances. Here are some of the most common types of bridging loan:
- Mini bridging loan - this is a smaller loan of up to around £200k. Finance is often agreed in under 72 hours so it can be a great way to get cash fast.
- Property development finance - property developers can use this loan to finance small or large-scale building projects.
- Land bridging loan - this is used to buy land, often without planning permission. Due to the risky nature of this type of development project, interest rates may be relatively high.
- Tax bridging loan - this is suitable if your business needs to pay an unexpected or large tax bill.
- Re-bridging loan - if time is running out on your bridging loan then you may need to organise a re-bridging loan. This will pay off the original bridging loan.
- Agricultural bridging loan - farmers use this to buy land or finance other projects.
- Auction bridging loan - a loan can be arranged in advance and used to pay the deposit on a property bought at auction.
- Closed bridging loan - businesses with a clear repayment plan may choose a closed bridging loan with a final repayment date. This is usually slightly cheaper than an open bridging loan.
- Open bridging loan - if you’re not sure when you can repay the loan then an open bridging loan may be more suitable. This type of loan is often more expensive than a closed bridging loan as there is no agreed final payment date.
How do interest rates work on bridging loans
Lenders calculate interest rates on bridging loans in different ways, depending on the terms of your agreement. Here are the main types of interest on bridging loans:
- Retained interest - interest payments are deducted from the loan before you receive your cash. You will pay a higher amount of interest compared to rolled up interest. This is because the interest is calculated on a higher loan figure. See the example below for a detailed explanation.
- Rolled up interest - interest is added to the loan amount rather than being paid every month. Your business owes this interest when the final loan repayment is due.
- Serviced interest - this works like a traditional mortgage and interest is due every month.
Here is an example to illustrate the difference between retained interest and rolled up interest:
Company A wants to borrow £88,000 to finance an asset purchase. They apply for a £100,000 bridging loan for one year with retained interest. Interest is charged at 1% per month. The lender calculates interest based on the full £100,000 loan value. They deduct this interest up front and pay company A £88,000 (£100,000 minus £12,000 interest). At the end of the year, company A owes the lender £100,000.
Company B also wants to borrow £88,000 to finance an asset purchase. They apply for a £88,000 bridging loan for one year with rolled up interest. Interest is charged at 1% per month. The lender calculates interest based on the £88,000 loan value. This interest is added to the loan value (interest is £10,560). At the end of the year, company A owes the lender £98,560.
What are the pros & cons of a bridging loan?
The pros and cons of a bridging loan depend on your business’s circumstances and the type of bridging loan you are applying for.
Pros
- Quick - mini bridging loans of above £25,000 can often be agreed in under 72 hours. Higher-value property bridging loans usually have a more complex application process and may take a few weeks to arrange.
- Suitable for niche projects - lenders may offer bridging finance for unusual projects that aren’t eligible for standard business loan.
- **Suitable for developers - large-scale development projects are risky by nature. They need a large amount of capital and sometimes don’t have planning permission agreed before a land purchase. Bridging loans may be the only type of finance available for this type of transaction.
- Short-term - if you don’t want to commit your business to a long-term loan then a bridging loan can be a great option.
Cons
- Expensive - interest rates on commercial bridging loans are comparatively high. This is because the lender is taking on the risk that you will not be able to repay your loan on time if your exit strategy fails.
- Large deposit - most lenders require a 20-25% deposit so your business will need some available cash. 100% loans may be available from some lenders if your business provides additional security.
- Complex application process - lenders often need to assess your business plan and your exit strategy to see if you have a realistic plan to repay the loan.
- Charge on your property or asset - lenders usually require a charge on your property or the asset you are acquiring. This could put your property at risk if you’re unable to make repayments.
- Affects credit score - if your exit strategy fails and you are unable to repay your loan on time then this may affect your credit rating.
How do I apply for a bridging loan?
Commercial bridging loans are available from banks, brokers and specialist lenders.
Lenders will perform personal or business credit checks. They will also ask to see information on the following:
- Use of loan - you will need to explain how your business will use the bridging loan.
- Affordability - lenders will consider your regular financial commitments to assess if loan repayments are affordable.
- Financial statements or bank statements - lenders will assess the financial health of your company.
- Business experience - if you are borrowing to finance a development project, then lenders look at evidence of your previous track record with similar projects.
- Business plan - lenders will evaluate your business plan, especially if you are applying to finance a development project. You will need to provide evidence of a clear exit strategy to repay the loan.
Where can I get a bridging loan?
Here are some lenders that offer commercial bridging loans:
Frequently asked questions
Lenders will assess what you are using the loan for and the financial health of your business before deciding how much to lend. They will also look at your track record of managing similar projects and if you have a suitable exit strategy to repay the loan.
For bigger development projects, some lenders will consider loans of up to £50 million or even more.
Like any secured loan, if your business can’t repay a commercial bridging loan your assets are at risk. The lender could repossess your property or seize your secured asset.
You should speak to your lender as soon as possible if you are struggling to make repayments. They may agree to a new lending agreement or re-bridge on different payment terms.
It may also be possible to arrange new finance with a different lender to pay off your existing loan.
Lenders charge arrangement fees and interest on bridging loans. How much you pay depends on the terms of your agreement.
Bridging loan finance is often more expensive than other types of business loan as they tend to be used to fund more risky projects.
The interest and fees on a bridging loan depend on the lender and the terms of your agreement. Interest is usually charged monthly and may be around 0.49-1% per month. Interest will usually be higher on shorter loan agreements or open bridging loans with no final repayment date.
If you want to improve your business’s cash flow but don’t want a bridging loan, then here are a few other alternatives:
- Improve your credit control – look into automating your invoice chasing process and consider if you can reduce your payment terms with your customers.
- Invoice financing – this is a type of business loan that’s secured against unpaid invoices due from your customers.
- Asset financing – this allows you to rent or gradually buy equipment for your business.
- Equity finance – find other investors to inject cash into your business without charging interest. The downside is that you might need to give up some control in your business.** (insert link)**
- Working capital loan – an umbrella term for short-term business loans used to finance day-to-day operations, which can include short-term business loans, business lines of credit and merchant cash advances.