Bridging finance can offer a lifeline to businesses, property developers and landlords in scenarios where timing is of the essence and other financial options, such as commercial mortgages, are not viable.
In this guide for businesses, we explain what commercial bridge loans are, when these are used, how they work, who is eligible and how to apply.
What are commercial bridge loans?
A commercial bridge loan, also commonly referred to as a bridging loan, is a form of fast and flexible short-term financing, typically used to buy or renovate commercial property. This is an interest-only loan and, as the name suggests, is designed to ‘bridge’ the gap between an incoming cost and a mainline stream of credit becoming available, such as a mortgage. Equally, if the borrower expects to receive a lump sum of capital, for example, if they are waiting for the sale of another property to go through, a commercial bridge loan on a short-term basis might be better suited to their needs than a commercial mortgage.
These types of loans are usually available from anything between one month to two years, depending on how long the loan is needed and the circumstances involved, with terms of around 12 months or less as standard for most commercial bridge loans. This should leave the borrower with ample time to secure longer-term finance or to sell the property on.
Whatever the reason or term, a commercial bridge loan can provide a borrower with the necessary capital to fund an important or potentially lucrative project where timing is of the essence. The bridging loan will essentially tide the borrower over until they are in a position to secure alternative lending or finance, or have the available cash funds to invest.
When are commercial bridge loans used?
Commercial bridge loans can be used for a variety of purposes, but are typically used to finance either the purchase or renovations of commercial or investment property. This can include office space, retail units, hotels, restaurants, takeaways, pubs, nightclubs, warehouses, factories, buy-to-let houses and even semi-commercial properties.
There are also a number of potential scenarios where a borrower might consider using a bridge loan, either as a springboard to a mortgage or, alternatively, to buy the time to free up cash funds. A business, property developer or landlord might choose this type of arrangement if they are ineligible for a mortgage in the short term or if they need funding quickly. They might also opt for this type of short-term financing where they are due to recoup a significant sum of money from an investment in the near future.
The following examples help to illustrate the various different reasons as to why people and businesses typically use bridging finance:
When buying a property at auction and funds are needed quickly. A successful bidder will usually need to exchange contracts and pay a deposit on the day, and to pay the full balance within a period of just 28 days. A commercial bridge loan could help to secure the property in the immediate term, as this can be arranged much quicker than a mortgage, often in a matter of days, buying the time to arrange refinancing later on.
When an applicant has been declined for a commercial mortgage because they have bad credit or insufficient income/earnings, but where their credit or affordability problems are due to be resolved in the very near future. A bridging loan could help to secure the property, pending resolution of any short-term credit or cashflow issues.
When an applicant has been declined for a mortgage on a buy-to-let property deemed uninhabitable. Some bridging lenders will be flexible enough to grant the funds necessary to carry out the required work to bring a property back into a mortgageable state.
When an applicant is looking to renovate a property, and to borrow against its increased value, but has been turned down for a secured loan. Bridging finance can provide the funds to revamp the property until a remortgage can be secured based on the new value.
When looking to buy a new property, but the sale of an existing property has fallen through, a bridging loan would provide the funds to proceed with the purchase, pending completion of a sale on the other property. Many bridging providers will be happy to lend under these circumstances, provided the property being sold has sufficient equity.
Technically speaking, a commercial bridge loan can be used in several other scenarios, provided there is a viable exit strategy in place. An exit strategy refers to the proposal to repay the loan within the agreed term, for example, switching to a commercial mortgage with lower interest rates, or using funds from the business or the re-sale of the property.
How do bridge loans work?
Commercial bridge loans are offered on a short-term and interest-only basis, where the borrower will not be required to make capital repayments until the end of the term. The borrowing will usually be secured against a property or other asset, as either a first or second charge, and the debt will be settled by the borrower’s exit strategy. However, relative to other forms of borrowing, interest rates can be much higher. Interest on bridging finance can be charged in any one of three ways: rolled up, monthly or retained.
With rolled up interest, the borrower will not be required to make any upfront payments. The interest is compounded monthly and becomes payable at the end of the term. This is suited to those who are short of capital, or have cashflow problems, until their chosen exit strategy has paid out. In contrast, monthly payments work in the same way as an interest-only mortgage, where the borrower chips away at the accrued interest each month, with the loan amount still due at the end. Finally, with retained interest, the customer is required to ‘borrow’ the interest, as well as the loan sum, where the total is calculated from the outset based on the length of the term but only becomes payable at the end.
When it comes to how much an individual or business can borrow using a commercial bridge loan, most bridging providers impose no strict limit on the amount they are willing to hand over, provided any exit strategy is enough to convince the lender to approve the loan. However, at the other end of the scale, many lenders impose a minimum loan amount, in this way ensuring that the deal is worth their while, financially speaking.
However, bridging finance, by its very nature, is flexible. As is the case with most commercial lending, commercial bridge loans are not regulated by the Financial Conduct Authority (FCA). This means that, as an unregulated form of financing, it may be possible to identify lenders who will approve small bridging loans, perhaps as little as £50,000.
Importantly, unregulated bridge loans simply means that this form of lending is not overseen by the FCA, which gives the borrower protection against things like bad advice and mis-selling. However, as unregulated bridging finance is not bound by the same strict rules and regulations, lenders have far more freedom around who they will lend to and on what terms, with the ability to assess applications on a case-by-case basis.
Who can apply for commercial bridge loans?
Commercial bridge loans are potentially available to individuals, partnerships, small businesses, limited companies, as well as large enterprises. Bridging loans are also available from a wide range of different lenders, typically with flexible criteria. However, in the case of both regulated and unregulated bridge loans, there are certain factors that lenders will look at and assess before approving an application. This includes a strong exit strategy, where without an exit strategy in place, most borrowers will not qualify for a bridging loan.
Evidence of a strong exit strategy is by far the most important factor in being approved for a commercial bridge loan, and in securing the best rates. Most exit strategies involve either a plan to sell or mortgage the property for which the bridging loan is being used to purchase, or to sell an existing property or investment, freeing up funds to pay off the loan.
Where applicable, it will help to have an offer on the table or a mortgage in principle, where the lender will expect the borrower to be able to show that their exit strategy is achievable. For development projects, the lender will be keen to see that the borrower has the means and wherewithal to complete the proposed works, exploring the possibility of delays or setbacks, and that the project will raise the necessary capital at the end of the loan term. The lender will also look at the location, build type and desirability of the property in question to help determine if this is guaranteed to sell with sufficient profit.
Lenders will often consider the borrower’s track record and experience in developing or selling property, especially if applying for a loan for an unusually complex project, where they may want to see evidence of previous success managing similar work. However, there are lenders out there who will be more than happy to deal with first-time developers, provided they can be persuaded that the exit strategy is achievable.
Other factors that lenders will consider include credit history, business finances and deposit levels. If a borrower has a strong exit strategy, a good credit score is not necessarily essential, provided any adverse rating does not put their exit strategy at risk. However, credit history can contribute to any approval or rejection in combination with other factors, and having a good credit rating will also help to secure the best rates.
Equally, historic and recent profitability as a business or limited company is not always essential, although when applying for a commercial bridge loan in this capacity, the lender may want to look at earnings before interest, taxes, depreciation and amortisation (EBITDA), a widely used measure of corporate profitability. Again, this is not necessarily a deal-breaker, but could be considered alongside various other factors.
In terms of a deposit, most bridging loans are offered with a 70 to 75% loan to value (LTV) ratio, based on the gross loan amount, so including any rolled-up or retained interest. This means that a borrower would need a deposit of at least 30 to 35% of the property’s value. However, if a borrower is in a position to put down a higher deposit, this will help to dilute any potentially negative factors, and to attract more favourable interest rates. As is the case with most mortgages, the best lending rates kick in with a LTV ratio of at least 40%.
How to apply for a commercial bridge loan
Applying for a bridging loan is not radically different to applying for a mortgage, albeit much faster. However, as the outcome of any application for a commercial bridge loan is likely to come down to the strength of the borrower’s exit strategy, this should be the primary focus of any application and supporting documentation. The more water-tight the plans to pay off the loan, the more likely the application for a loan will be approved.
First and foremost, therefore, a borrower must prepare their exit strategy including, where applicable, proof of any agreement in principle for the sale or mortgage of an existing property and the paperwork to back this up. The borrower should then seek expert advice from a bridging finance broker, someone with extensive knowledge of the market and trusted relationships with numerous lenders. The bridging finance market is huge and it can be difficult to find the right lender, offering the best terms, without specialist advice. In some cases, it may be possible to use the same lender for the commercial bridge loan and later mortgage, or different ones if the rates available work out more favourable that way.
A bridging loan broker will assess the viability of the exit strategy, and guide the borrower through the application process, pairing them with the finance provider who is best placed to offer a favourable deal based on the borrower’s need and circumstances.
Commercial bridge loans FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
