A commercial bridging loan is a short-term loan secured on a commercial property. Those taking a commercial bridging loan need to have a clear strategy to repay the loan when it is due. This might be using the sale of the property, funds from the business or refinancing to a longer-term of borrowing with a lower interest cost, such as a commercial mortgage.
A bridging loan can help businesses to cover infrequent expenses that need payment quickly. This might be to pay for new lines of stock or to cover a tax bill. The bridging loan is secured against a commercial property such as a warehouse, barn, industrial unit, or office. This is then either repaid before the expiry of the bridging loan or refinanced to an alternative form of business borrowing, such as a business loan or commercial mortgage.
Zero hours contracts that allow businesses to respond to changes in demand also result in spikes in wage costs. Those businesses that offer clients credit may then find cashflow is pinched between needing to pay their staff and receiving income from their clients. If this is infrequent then a short-term loan, such as bridging can help a business to meet its variable wage bills until it recoups these costs from its client. Those where this may be a more frequent occurrence could also consider a more long-term facility such as invoice finance.
Businesses can use a commercial bridging loan to purchase a new property either to expand their business or as an investment. The bridging loan can then be repaid, either when the property is sold or refinanced using a commercial mortgage. Bridging loans are faster to complete than a commercial mortgage so allows businesses to respond quickly.
Property developers wanting to purchase property that needs significant renovation, change of usage or planning may find commercial mortgage lenders less willing to give them they money they need. This is because they will have specific underwriting criteria for the types and condition of property they will accept and the maximum loan-to-value (LTV) they will cover. Developers can use a bridging loan to fund the redevelopment work. Once this is completed the property should have increased in value (subject to no market wide changes in values) and be more likely to meet the required standards of a commercial mortgage lender. The property developer can then switch to a commercial mortgage if they intend to lease out the property or sell it and repay the bridging loan.
The main four differences between a bridging loan and a commercial mortgage are speed to complete, the length of term, the interest cost and the underwriting criteria.
Bridging loans can complete in weeks compared to the months it can take to complete a commercial mortgage. This is because bridging lenders often used automated valuations that are quicker than waiting for a physical valuation.
Bridging loans are designed to be used for short periods of time, often no more than 18-months, whereas a commercial mortgage could have a term of many decades.
Bridging loans have higher rates of interest than a commercial mortgage. This is to cover the additional risk the lender is often taking compared to a standard commercial mortgage.
Bridging lenders may also accept a poorer condition of property or be willing to accept a higher loan-to-value (LTV) compared to a commercial mortgage lender (again a reason rates differ between the two). The developer can renovate the property, increasing its value and becoming more likely to meet the underwriting criteria and LTV of a commercial mortgage lender in the future.
If your business needs a quick decision and access to funding, and has a clear way to repay the loan when it completes then a bridging loan is likely to be a sensible option. Whereas it makes financial sense to wait for a commercial mortgage if your business is not in a hurry and the interest rate is lower than a bridging loan.
A business can use a bridging loan to quickly purchase a property for commercial purposes. This property may be to operate a business from or as an investment to sell or lease after a renovation.
The different types of commercial property that could be bought using a commercial bridging loan are:
Different bridging lenders will have different rules on the types of property they can consider. Our preferred commercial bridging loans broker, Watts Commercial can help you to find the right lender for your business. Call them now on 0330 417275 or arrange a call back.
Residential bridging loans are regulated by The Financial Conduct Authority (FCA) and require an affordability test. A residential bridging loan is defined as money borrowed against a property in which the applicant or a direct family member intends to live in or has lived in during the past 12-months.
As is the case with most commercial lending, commercial bridging loans are not regulated. However lenders will still undertake affordability checks to protect both their business and their customers from inappropriate lending.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.