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Utilising A Bridging Loan For Your Next Commercial Property

Bridging finance is a common way to get commercial development projects started or finished, particularly when you need to borrow money quickly. Funds can sometimes be made available in a matter of hours in some circumstances (if you have a relationship with your lender) and it rarely takes more than a fortnight.

How do they work?

Bridging loans are a short term secured loan where the security offered by a borrower is either commercial, semi-commercial or buy-to-let properties. Lenders offer a far more adaptable and flexible approach to borrowers than commercial mortgage providers. A commercial property developer can borrow over as little as 30 days right up to 36 months with interest charged daily.

How Much Can I Borrow With A Bridging Loan?

The amount of money you can borrow with a commercial bridging loan depends on what you need the money for. If you simply wish to purchase property which needs little or nothing doing to it, a lender could fund up to 70% of the purchase price of the property. For example, if you wished to purchase a retail unit worth £250,000, you’d need to have a deposit of 30% or £75,000.

Repaying Commercial Bridging Loans

The way you repay a commercial bridging loan is very different to the way you repay a commercial mortgage.

With standard commercial mortgages on offer from traditional lenders, you make a monthly repayment towards the capital (the amount of money you borrowed in the first place) and the interest (your lender’s charge on the capital they advanced you). And, with commercial mortgages, interest rate charges are given annually, either fixed or variable rates being available.

With commercial bridge loans, you don’t make monthly payments on the capital – instead, you repay it all in one go at the very end of the loan. You can choose to make monthly interest repayments but you don’t have to. You can roll up all of the interest charges and repay them together with your capital at the end of the loan (although this is slightly more expensive than paying monthly).

You can also choose the retained interest option. This is like rolled up interest but you’re able to borrow against the rolled up interest if you need it. This is the most expensive option as you are charged interest again on the capital and the rolled up interest – have a chat with us on this one.

When applying for any commercial bridging loan, your lender will want to know what your exit strategy is – this is how you propose to repay them. For example, if you purchase commercial property with a view to renovating it and trading from those premises, the standard exit strategy would be to repay the loan from the proceeds you receive from a standard owner-occupier commercial mortgage.

Alternatively, your exit route might be:

Requirements for Commercial Bridging Loans?

For any commercial bridging finance, you will need to meet specific lender requirements before the loan can be granted. Here at Pegasus, we work with an experienced pool of lenders with fantastic appetite; you will need to provide one of the following as acceptable security for commercial bridge loans.

The Pros and Cons of Bridging Finance

There are many benefits to bridging finance. As we have already mentioned, the main advantage is the quick access to funding, as well as the ability to fill short-term finance gaps in your business when you are between other forms of capital. Lenders are often agile and swift to process applications, meaning funds can be released after a turnaround period as short as 24 hours.

While some lenders will consider your credit history before accepting you, it is possible to get ‘non-status’ loans which do not take into consideration your credit score or risk and instead focus on exit for the bridging finance. This means that even companies who have struggled to get finance elsewhere may be able to access a loan.

Due to the short-term timeframe associated with bridging finance, even if you pay off the loan early, there is normally a minimum loan term and as such no penalties per se.

There are some downfalls of bridging loans versus a standard loan. Due to the short-term nature of the finance, interest rates tend to be higher – usually around 0.4-1.5% per month. There are also commonly fees to pay, including arrangement fees and other legal fees, which you will need to account for. There may also be exit fees.

Bridging loans offer the choice of retained or serviced interest payments. In a serviced interest arrangement, you make the monthly interest payments. Where it is a retained arrangement, you make no interim payments but at the end of the term, the full cost of the loan including the interest is repaid.

Bridging loan providers are not always regulated by the FCA, meaning that borrowers are less protected. It is therefore essential to do your research beforehand to make sure you are committing to a credible lender and carefully read the fine print to make sure you aren’t entering into a bad deal.

Summary

Bridging finance is a viable option for commercial property developers needing short-term funding, particularly to cover the acquisition and development of new premises or other investment opportunities.

If you need advice on whether bridging finance could work for you or what the alternative arrangements may be, we are here to help. Our team of expert advisors have experience working in a range of industries, businesses and utilising different finance solutions, meaning we can help you to find the right path for you and your unique situation.

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