Finding the best commercial bridging loan for your business
Bridging loans are a unique type of business loan. Learn how they work, what makes them different, and how to find the best bridging loan for your business.
What is a commercial bridging loan?
It’s a short term loan for businesses to ‘bridge the gap’ when commercial finance is needed quickly. Business bridging loans are secured against commercial property or assets and can be used to buy commercial premises or fund a business enterprise.
What is a business bridging loan used for?
They’re often used as bridging finance for commercial property or as a solution to a short term cashflow. Here’s some examples of the reasons you may need commercial bridging finance:
- Buying a new office building or retail unit
- Property renovations or conversions
- Business cashflow injection
- Paying a tax bill
- Temporary Increase of company assets
- A deposit for an auction purchase
- Starting a new business venture
- Relocation of premises
How do business bridging loans work?
They work in a similar way to a normal bridging loan. When you take out a bridging loan, a ‘charge’ will be placed on your property or another security asset. This is a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loans.
You’ll be charged interest on the business loan and usually required to repay it as a lump sum after a set period.
These are the two types of commercial bridging loans:
- Open bridging loans: This is when there’s no fixed repayment date. You’ll be able to decide how much is repaid and when. The terms of your exit route may not be as clearly defined. The downside is you’ll pay a higher interest rate and it’s harder to have your loan application approved.
- Closed bridging loans: You’ll have a fixed repayment date and the balance will be due in full on that date. Your exit strategy will need to be clearly outlined and penalties will apply if you can’t repay by the agreed date. They’re not as flexible, but will have lower interest rates and are easier to get.
How long does a bridging loan last?
It’s basically a temporary loan, so it’s meant to be short term and typically lasts between three and 18 months, however, you may find a commercial bridging loan lender who’ll let you borrow for just one month or for as long as 36 months.
How much can be borrowed for a business bridging loan?
You could potentially borrow as much as you want as long as you have the collateral to secure the loan and a suitable exit route. Typically, you could borrow anything between £50,000 and £25 million but some commercial bridging lenders may agree to as little as £5,000 or as much as £250 million.
What are the criteria for bridging finance?
All businesses including limited companies and not for profit organisations are eligible for commercial bridging loans.
Bridging loans are not based on earnings or income, but the commercial bridging loan lender will want to know how your business intends to repay the loan. This is known as the exit strategy and is a vital part of the application process.
You’ll need to provide evidence of your exit strategy which could include;
- The sale of the commercial property
- Refinancing existing debts
- Cash redemption, for example, a VAT refund
Can you get a business bridging loan with bad credit?
Your credit score will be taken into consideration but it isn’t the most important factor in a lender’s decision. Having bad debt or a poor credit history doesn’t necessarily mean your bridging loan application will be rejected.
The planned exit route or strategy is viewed as most important, so if you can provide evidence that a planned property conversion will be sold for a profit, your application could be successful despite your credit history.
However, refinance as an exit strategy for someone with bad credit may be seen as riskier and the lender may want proof of another exit route.
What are the costs associated with a bridging loan?
Commercial loan interest rates are often higher than those for a residential bridging loan due to the level of risk. On top of the repayable bridging loan, you can expect to pay;
- Interest ratea – up to 1.5% per month
- Arrangement fees – around 2%
- Legal & valuation fees – from £1000
- Broker fees – around 1%
- Administration fees – variable
What’s the difference between a residential bridging loan and a commercial bridging loan?
A residential bridging loan is money borrowed against a property in which the applicant or family member lives. They’re typically used for residential investments or by housebuyers waiting for the sale of another property.
Residential bridging loans are regulated by The Financial Conduct Authority (FCA) and require an affordability test.
A commercial bridging loan works on the same principle but if you want a bridging loan for a commercial property like a retail unit or a business office, the overall use of the property has to be more than 40% commercial.
As with most commercial lending, business bridging loans are not always regulated. However commercial bridging finance lenders will still undertake affordability and credit checks to protect against risk.
What are the pros and cons of commercial bridging loans?
There are times when a bridging loan could be the best business borrowing option, however, it makes sense to weigh up the costs and benefits before applying.
- A speedy solution to short term cashflow
- It’s not income-dependent
- You can get with bad credit
- Quick approval is possible if you meet lending criteria
- You’ll need a good exit strategy
- There are lots of fees and charges
- You’ll pay a high interest rate
- It’s secured against your business, property or assets
- You could risk losing your home, business or assets
- Some business loans are unregulated
Are there any alternatives to bridging loans?
A business bridging loan is a good option if you’re in temporary need of funds however, it may not be the best business borrowing option if you don’t have a strong exit route. Here are some other options:
- Unsecured business loan – best for longer-term borrowing under £25,000
- Personal loan – a flexible, unsecured loan you can use for any purpose
- Secured business loan – better for amounts over £25,000 and long term credit but could be risky if your business fails
- Secured loans – best for long term loans over £25,000, but you could lose your home if you don’t keep up repayments
- Equity release – use the equity in your property to release cash funds so no need to borrow
Bridging Loans FAQs
Are business bridging loans regulated?
No, commercial bridging loans aren’t regulated by the Financial Conduct Authority (FCA), unless they’re secured by a first charge against your home. The same goes for all business loans.
Work with a reputable loan company and talk directly to the lender to protect yourself and your business if things go wrong.
What is a commercial mortgage?
Commercial or business mortgages are often used for company owners who are looking to buy property or land for commercial, office or retail use.
The main difference between a commercial mortgage and a residential mortgage is that business borrowing is usually;
- for larger amounts of money
- borrowed over a shorter term
- require a higher deposit or lower LTV
A commercial mortgage may be tailored for the business rather than an off the shelf product because commercial needs and financial circumstances vary so much.
Can a limited company get a bridging loan?
Yes, if you trade as a limited company, you’ll get the same rates and conditions as other commercial borrowers.
Your limited company may need a personal guarantee from the company directors or the lender may stipulate that your limited company becomes a Special Purpose Vehicle (SPV).
Can I get 100% bridging finance?
It’s possible, but they’re tricker to find and get approval for. A typical bridging loan is for up to 75% loan to value (LTV) and you’ll be required to put down a 25-30% deposit.
However, there are several specialist brokers who may provide 100% finance for your project, however, it’s likely you’ll still only be able to borrow against 70% of your asset value which is usually property.