Education

Commercial bridging loans explained

8 Dec 2022

A commercial bridging loan is a type of short-term funding. For example, as a business owner you might use a bridging loan to cover the cost of a purchase while you wait for the sale of the asset you’re selling in order to purchase it to go through. The term ‘bridge’ is very revealing: essentially, the finance bridges a gap in funding until long-term funding is secured. Bridging loans are commonly associated with property purchases, but they can in fact be used for a range of business purposes.

Piggy bank and house model

If you need a short-term finance boost, bridging loans might be worth exploring. 

A bridging loan is a type of commercial finance that lets you borrow money over a short period. Although the terms can be shorter than bank loans, interest rates can also be higher. The maximum term for a bridging loan tends to be around 12-18 months. 

Bridging loans are designed to plug a short-term hole in funding while you wait for your long-term funding solution to come through. 

For instance, you might use a commercial bridge loan to buy a new commercial property while you wait for a mortgage or to sell an existing commercial property on your portfolio. Or perhaps you need a commercial bridging loan to cover the cost of a large amount of stock that you’ll subsequently sell on to customers. 

These are just two examples – there are many more besides!

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Open or closed bridging loans

While exploring commercial bridge loans, you’ll probably come across the terms “open” and “closed”. Open bridging loans are flexible in that there is no set date for paying off the loan, but it’s likely that you’ll have to repay it within 12 months. 

An open commercial bridge loan might be more appropriate if, for example, you don’t yet have a buyer for your property.  

Closed bridging loans do come with a fixed repayment date.  

A closed commercial bridge loan might suit your circumstances more if, for instance, you have a completion date for both the purchase of your new commercial property and the sale of your existing one. 

Security for bridging loans 

One of the benefits of bridging loans is that they are usually quick to arrange compared with other types of commercial business finance. Bridging loans are secured, so you’ll be expected to provide the lender with security. 

You could use property, land, or other high value assets such as equipment or machinery, or even the value of unpaid invoices or equity. So, don’t rule yourself out of a bridging loan if your business doesn’t own its commercial premises. 

One thing to bear in mind is that the amount you’ll be able to borrow will hinge on how much the asset you’re using as security is worth. Bridging lenders usually provide a loan-to-value ratio of up to 75%. This means you could borrow up to 75% of what your asset – whether it’s equipment, equity or something else – is worth. 

Interest on bridging loans 

Don’t forget that you’ll have to pay interest on your bridging loan too. The amount of interest you’ll have to pay will depend on how much you’re borrowing, the loan term (e.g. 12 months) and the level of risk the lender thinks your business poses. 

Because interest rates tend to be higher for bridging loans compared with other forms of finance, they’re usually used to fund high value projects. 

The lender will take into consideration aspects such as your business’ trading history, cash flow and credit score. For this reason, if you’re a startup or have bad credit, you could find it difficult to get approved for finance or may have to pay a higher interest rate. 

As with other forms of finance, interest on your bridging loan can be fixed or variable. A fixed interest rate will stay the same for the loan term, whereas a variable rate might vary as market interest rates change. This can make it hard to determine the overall cost. 

Aside from the loan amount and interest, it's important to factor in other expenses when working out the overall cost of the loan. You may have to pay for the following:

  • Arrangement fee

  • Valuation fee 

  • Broker fee

  • Exit fee 

Retained, rolled up or monthly bridging loans

When you pay the interest depends on the type of bridging loan you opt for. You might decide to pay at the end of the loan term or on a monthly basis. A bridging loan can be retained, rolled up or monthly. Here’s a definition for each: 

  • Retained bridging loan – When the lender retains the interest and you pay it in a single lump sum in the last month of the loan term. It can be the more costly option, however you won’t have to make monthly interest payments. So, if you have an 18-month bridging loan, you’ll pay the interest in month 18.  

  • Rolled up bridging loan – Like retained loans, the interest is deferred, however instead of retaining the interest the lender adds it each month. The interest increases because each month’s interest aligns with the renewed sum of the loan in addition to the interest from previous months. 

  • Monthly bridging loan – Interest is paid on a monthly basis. Although paying interest monthly can be the overall cheaper option, you might prefer to defer your interest payments in order to focus on developing your property, for instance. 

Recap: Bridge loan benefits

  • Flexibility – There are lots of options to choose from within bridging finance: open or closed bridging loans; bridging loans with interest retained, rolled up or paid monthly, for example. 

  • Speed – Bridging loans can be available faster than some other types of finance; you might be able to get one within as little as one to two days. 

  • Higher limits – Securing a loan against a high value asset could mean that you are able to borrow more than you would be able to through unsecured finance. 

Recap: Bridge loan disadvantages

  • Interest rates – Bridging loans are short-term and tend to come with higher interest rates, which is usually calculated monthly as opposed to annually. 

  • Fees –  You have to account for the arrangement and valuation fees, etc. 

  • Risk –  As with other types of secured finance, the asset you provide as security could be repossessed if you don’t adhere to the loan repayment terms. 

 Applying for a bridging loan 

You can use Funding Options to compare bridging loans and find the best finance solutions on the market. Start by telling us how much you need to borrow, what the finance is for and how quickly you need it, and we’ll compare over 120 lenders to match you with the right finance options for your needs.

Funding Options covers a range of business finance solutions, including bridging finance, asset finance, merchant cash advances, invoice finance, revolving credit facilities and more. We can also match you with business credit cards and overdrafts.  

Whatever your needs, we’ll provide you with expert help throughout the process. 

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Joe Morley

Joe Morley

Head of Unsecured Lending

Joe has worked in the alternative lending space since 2015. During this time he has helped hundreds of SMEs access millions in essential funding ranging from long-term asset-backed lending to short-term unsecured revolving credit lines and beyond. In his role, Joe manages and supports a large team of Credit Finance specialists.

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