Bridging loans can be a key tool in the funding arsenal of SMEs. Despite this many business owners still don’t understand them, or how they can be used to benefit the business.
In this guide, we will break down what bridging loans are, when they should be used, the costs associated with them and the key considerations before moving forward.
What is a bridging loan?
A bridging loan is a short-term loan which is secured against a property. They are usually offered for up to 18 months and are designed to satisfy a funding requirement that needs to be addressed quickly.
These loans are generally designed to be paid off at the end of the term either through the sale of the security property or by refinancing to a longer-term loan, such as a commercial mortgage.
Many bridging loans aren’t regulated, so you should be cautious about who you choose to deal with. Where loans are secured against your own home, they may be regulated by the FCA, depending on a few factors.
When should bridging finance be considered?
Bridging finance can often be arranged in 5-14 days, making them a popular option when funds are needed urgently.
As there are often no monthly repayments to make, the application process is very straightforward as there are no affordability checks to make, as long as you have a suitable exit in place.
Although they can be used to fund almost any urgent requirement, the main reasons that people choose a bridging loan are:
- Facilitate a fast property purchase
- Purchase a property before their current one is sold
- Fund the purchase of more stock
- Buy a property at auction
- Funding cash flow in the short-term
- Meeting a tax or VAT liability
How much do they cost?
The flexibility offered by a bridging loan does come at a price. The cost tends to be higher than those associated with commercial mortgages.
You can generally expect to pay a lender arrangement fee of 1-2%. Lower arrangement fees tend to be reserved for larger loans.
In addition to the fee, you must also pay interest. The rates are generally quoted on a monthly basis, with rates starting at 0.48% currently, and 0.55% for commercial properties.
The maximum loan is generally 75% loan to value for residential properties, and 70% for commercial.
The costs can differ by a large amount and are often priced based on the risk presented to the lender. Low risk applications include those from strong applicants, against in-demand properties at lower loan to values.
How do I secure a bridging loan?
As mentioned above, applications tend to happen on a case by case basis, so there’s no set list of documents needed.
The first step is to either talk to an expert or compare rates online. Once you’ve found a suitable product, you will generally be expected to complete an application form and provide details of your exit strategy – how you will repay the loan.
The lender may then ask for additional information to allow them to fully assess the application, although this isn’t always required.
Once the lender is satisfied, a surveyor will visit the property and produce a report, and the legal process can begin. Legals are generally less demanding than those associated with mortgages, so can generally be completed in just a few days.
The key considerations before moving forward
As with any finance, care must be taken before proceeding with a bridging loan. You should carefully consider the benefits of raising finance along with the costs of any loan.
As bridging loans are a short-term solution, your chosen exit strategy is the key factor to a successful loan. You should ensure you have a watertight method of repaying at the end of the term.
Finally, when comparing options from different providers, you must consider the total cost of finance, rather than just the interest rate.
As rates can vary so much between different providers, it’s important that you either get quotes from 2-3 (or ideally more) providers or compare products online. This will ensure you’re getting the best possible deal.
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