What is a Bridging Loan or Bridging Finance?
Bridging loans and bridging finance can cause some confusion and hesitation among some people and businesses who contact us, certainly if they’re new to property development. Here we explain the simple concept of what may be a very suitable finance product for your business position.
Can it help you?
Bridging finance is termed as a short-term business loan. It can take many forms depending on the circumstances. It’s best to acknowledge it as a temporary loan which gets you from one point to another until you can either clear the loan in full or secure a more permanent or longer-term solution. That’s where the “bridge” concept comes in – it’s financing to get you from one step to another.
Why would I choose bridging over a regular term loan?
In theory, a bridge loan is for a specific short term purpose, whereas term loans are often used for any commercial purpose. In reality, the turnaround for the cash to be in your account is the main difference. It can take any where from a week to three weeks for some lenders to complete a term loan, but a bridging loan can be ready in 24-48 hours.
What is bridging finance best suited for?
Lenders that offer bridging facilities mostly do so for the purchase and renovation of property — it is commonly a form of property development finance. They can be both commercial and residential, and the works can be ground-up property developments or converting a house into an HMO (house of multiple occupancies).
You can, in some instances use bridging finance for other short term commercial purposes, as long as you have a clear exit in place — although it depends what appetite the lender has for your planned use of the funds.
Hold on! What’s an exit?
“Exits” is a term Lenders use tp identify how you are going to repay the bridge loan in full (with the interest costs) or move it onto a more permanent type of finance, like a term commercial mortgage.
You may hear about closed bridging loans and open bridging loans. Closed loans are a line of credit which have a definitive end date in place. For example, the sale of the property to pay back the loan is already in place at the time of taking the loan. Open loans are given without the exit yet confirmed, so you are given an approximate period. In all instances it will depend on your commercial needs and the Lenders appetite, but this can be identified when you speak to one of our team.
Does that mean the rates are extortionate?
Given the specialism of this type of loan i.e., it’s for a specific short term purpose – the interest rates are typically higher than traditional term loans.
You can sometimes choose to have the interest payments ‘rolled up’, which means you don’t have to pay monthly but instead pay a lump sum at the end of the agreed term. This makes it useful for those without the required funding at the early stages of receiving the loan.
Other interest terms you may hear are serviced and retained. Serviced interest is interest paid monthly, for those who have regular cash flow, whereas retained is a mix between serviced and rolled up
Bridging loans can be the foundations of property development funding
Let’s say a developer owns a site and has planning permission from the council to build a few houses. A good solution for this property development, to spread the costs for the company, maybe to get a bridging loan for 3-6 months, which gives them the funds to complete the work. This loan is fully paid off after the period either by the sale of each property or by moving the bridging loan onto a longer-term finance product like a commercial buy to let portfolio mortgage.
Bridging loans can sometimes be used in other commercial areas where a short term temporary loan may be required. This is providing there is a clear ‘exit’ from the loan.
How much will it actually cost me?
This will depend on the circumstances of the loan — typically, there will be a fee for the arrangement (sometimes known as an entry fee) of the loan and there are administration fees as with all products. This varies from lender to lender, and we will be on hand to explain any complex terms and conditions so you know what to expect.
Property development are great, but what about refurbishments?
It’s a great product for renovations and refurbishments because you get funds really quickly to allow you to start the works asap.
In most cases, bridging loans are often used to convert properties into a condition where a lender can provide a commercial mortgage. Not all properties are eligible for certain types of mortgages — you can use bridging finance to get the work done and get the property into a state where you can exit into a full-term mortgage.
Just be clear on the types of work needed, as some lenders will differentiate between soft renovations (new kitchens, plumbing etc) and structural renovations (replacing roofs, moving load-bearing walls.)
This even works for buyers at auctions. Bridging loans can assist with the purchase, rather than go to a traditional provider where the process can be much longer – after all, you often only have up to 28 days to bring the funds to the table at auctions, making a bridging loan ideal.