What is a Bridging Loan?

You’ve probably heard the term “bridging loan” and have a general idea of what it involves, but understanding the full scope of its costs and risks is crucial for making the right financial decision. Bridging loans can offer the flexibility and speed you need to access immediate capital, whether for seizing business opportunities or managing cash flow gaps. We’ve broken down exactly what a bridging loan entails, and how it could be the key to unlocking swift and adaptable financing for your needs.

What is a Bridging Loan?

Bridging loans can provide a quick and flexible solution for borrowers who require a cash flow facility over a short-term period (usually 12 months), to support their business or take advantage of an opportunity.

These can include:

• Purchasing a building/land in a short space of time than a standard commercial mortgage would take
• A short-term cash flow facility to support the business, that has a clear repayment vehicle showing (sale of property/investment maturing for example)
• Refurbishment of a property that is due to be sold in the next 12 months
• Purchase of an auction property, where a commercial mortgage will be used to repay the bridge within the agreed timescale the bridge is agreed on.

A bridge is a flexible way of lending money quickly against property already owned or being purchased; typically, the interest rate is agreed and charged monthly however in some cases, you can defer all interest costs until the end of the term, meaning no repayments for the period you lend, with the exit vehicle paying the full amount at the end of the agreement.

Usually, the main barriers and initial costs are valuations being completed and whatever legal work needs to be done – Valuations are typically done by a valuer approved by the funder. The loan arrangement fees and exit fees are usually rolled into the agreement – If you are expecting to be able to repay the facility back early, it is important to know if there is an exit fee for doing so.

Before entering into a bridge agreement, it is vital you are completely comfortable with your exit plan. If you are unable to repay or refinance the bridge agreement at the end of the term, you may face large default costs for missing the exit date, or your property may be at risk of repossession.

Are There Other Considerations within Bridging?

What if my property is encumbered? Funders prefer to fund on a first charge basis, however, many will fund on a second or third charge basis if there is sufficient security available.

What happens if I don’t know how quickly I can exit or my exit isn’t 100% determined? This is when you consider an open or closed bridge. An open bridging loan has no fixed repayment date but that option comes with a premium or a lower LTV.

What are My Typical Charges and Fees?

• Interest Charges
• Arrangement and Exit Fees
• Administration Fees
• Legal Fees
• Valuation Fees
• Drawdown Fees

What if a Bridging Loan Isn’t Right for Me?

The consideration is the volume of money that is required and the timescale that it is needed in – There are always options in the market for “small” amounts of money if business can prove serviceability however for larger amounts of money or where the serviceability isn’t evident, bridging may become a worthwhile consideration.

What Do I Need to Get a Bridging Loan?

• Details of the Asset Being Given as Security – Provide comprehensive information about the property or asset used as collateral, including its address, legal ownership, current value, and any existing encumbrances. This helps the lender evaluate the asset’s worth and risk.
• Last Set of Financials – Submit the most recent financial statements for your business or personal finances, including balance sheets and profit and loss statements. These documents help the lender assess your financial health and repayment ability.
• Year-to-Date (YTD) Management Accounts – Provide up-to-date financial summaries for the current fiscal year, including profit and loss statements and cash flow details. YTD accounts offer a recent view of your financial performance, aiding in the assessment of your short-term financial stability.
• Desired Exit Plan – Outline your strategy for repaying the loan, including the method and timeline for settling it. Whether through asset sales, refinancing, or other means, a clear exit plan shows the lender how you intend to repay the loan and ensures you’re prepared for the repayment process.

 

Bridging loans offer a valuable lifeline for those needing quick, short-term financing, particularly in scenarios where traditional loans might not suffice. However, they come with their own set of challenges, including higher costs and the need for a clear exit strategy. Before committing to a bridging loan, it’s crucial to fully understand the terms, associated fees, and the potential risks involved. By carefully considering these factors, borrowers can ensure that a bridging loan is the right financial tool for their specific needs, enabling them to achieve their business or investment goals effectively.