A guide to commercial bridging loans

Commercial bridge loans are a lifeline for businesses needing quick, short-term financing to seize opportunities or navigate financial transitions. Whether it's purchasing new property, funding renovations, or managing cash flow gaps, these loans provide the crucial capital businesses need to stay agile and competitive. 

Here we'll explore what commercial bridging loans are, how they work and how to decide if they’re right for your business.

What is a commercial bridging loan?

Commercial bridge loans enable businesses to bridge the gap between the purchase of a new property and the sale of an existing one. Companies can access short-term financing – for instance, a business might use a bridge loan to purchase new office space before selling its current premises

‍How does a commercial bridging loan work?

A commercial bridge loan works by providing businesses with a temporary source of capital to cover the buy price of a new property. It is typically secured against the value of the business's existing property or the property being purchased. The loan term usually ranges from a few months to a year, allowing businesses enough time to complete the sale of their current property.

Step-by-Step Process

• Application: Submit an application detailing your financial needs and business plans.
• Approval: Lenders evaluate your application, focusing on credit history and collateral value.
• Funding: Upon approval, funds are disbursed quickly, often within a few days.
• Utilisation: Use the funds to purchase property, cover expenses, or bridge cash flow gaps.
• Repayment: Repay the loan either through proceeds from the sale of assets or through refinancing.

One of the key advantages of a commercial bridging loan is speed. Traditional loans can take a long time to process, which may not be workable for businesses that need immediate funding. Bridge loans, on the other hand, can be approved and funded within a matter of days, allowing businesses to move faster.

Why use a commercial bridge loan in the UK? 

There are several reasons why businesses choose to use a commercial bridge loan. 

1. Speed: It allows them to take advantage of time-sensitive opportunities in the property market without having to wait for their current property to sell.
2. Flexibility: A bridge loan provides businesses with the necessary liquidity to fund the purchase of a new property, even when their existing property may not have sold or the proceeds have not been received yet. This ensures a smooth transition and minimises the risk of missing out on profitable ventures.
3. Investment: A commercial bridge loan can be used to finance property renovations or improvements, allowing businesses to increase the value of the property and generate higher returns in the long run. It offers flexibility and convenience, making it an attractive option for businesses in need of short-term financing.

What are the interest rates of a commercial bridge loan? 

When looking for a commercial bridge loan, it's important to compare different lenders' commercial bridge loan rates. Because bridging loans are generally short-term, lenders calculate the interest monthly rather than using an annual percentage rate (APR). You repay this interest in one of three ways:

• Monthly basis: you pay the interest every month, and the lender doesn't include it in your final balance.
• Rolled-up deal: you pay all the interest at the end of the term.
• Retained interest: the amount you borrow covers the monthly interest payments, meaning you pay everything back at the end of the loan.

The interest rate will usually be set by the loan to value ratio (LTV) – the size of the loan compared to the value of the property. The below represents average figures across lenders.

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What are the types of commercial bridging loan?

There are several types available, each tailored to meet specific financial needs and circumstances. Here’s a detailed look at the different types of bridging loans:

Open Bridging Loans

Open bridging loans do not have a fixed repayment date. They are typically used by borrowers who are uncertain about when they will receive the funds to repay the loan, such as awaiting the sale of a property.

Closed Bridging Loans

Closed bridging loans have a fixed repayment date and are suitable for borrowers who know exactly when they will have the funds to repay the loan, such as those who have exchanged contracts on a property sale. 

First Charge Bridging Loans

A first charge bridging loan is secured against a property that does not have any existing mortgages or loans. The lender has the primary claim on the property in case of default. 

Second Charge Bridging Loans

Second charge bridging loans are secured against a property that already has an existing mortgage or loan. The lender's claim is secondary to the first charge holder. 

Fixed Rate Bridging Loans

Fixed rate bridging loans have an interest rate that remains constant throughout the loan term, providing predictable monthly payments. While this makes them more predictable, it may also result in a higher interest rate.

Variable Rate Bridging Loans

Variable rate bridging loans have an interest rate that can fluctuate based on market conditions, leading to changes in monthly repayment amounts. This offers potential for lower initial rates but remember that monthly repayments can increase if interest rates rise.

Commercial bridge loan example

You can calculate the cost of a commercial bridge loan based on the ratios above. These rates can vary depending on the lender but represent an average - based on our research across different lenders.

The loan-to-value (LTV) ratio refers to the loan amount divided by the property's appraised value. For example, if you plan to buy a property worth £200,000 and you need to secure a loan of £120,000, in funding then the LTV would be 60% (£120,000/£200,000).

So, if for example you have a loan amount of £200,000, and the LTV ratio is 45%, the interest on your loan will be £1,060 per month (0.53% of 200,000)

Lots of businesses use iwoca’s Flexi-Loan to bridge gaps like this - whether that’s for property or to cover unexpected costs. Some of the benefits of taking a loan include:

• you only pay interest for each day you have the funds
• there are no fees for early repayment
• top-ups are available
• there’s no obligation to take the money after approval

‍Qualifying for a commercial bridge loan

To qualify for a commercial bridge loan in the UK, businesses must meet certain requirements set by lenders. These requirements may vary depending on the lender's criteria and the specific circumstances of the loan.

Lenders typically consider factors such as the borrower's credit history, financial stability, and the value of the collateral. They may also evaluate the profitability and viability of the business, as well as the anticipated timeframe for the sale of the existing property.

‍Risks involved with commercial bridge loans

While commercial bridge loans offer many benefits, it is important for businesses to be aware of the risks associated with this type of financing. One key risk is the potential delay in the sale of the existing property, which could result in increased interest costs and the need for alternative repayment options.

You should also consider the possibility of fluctuations in property values, as this could affect the ease of selling both the current and new properties. It is crucial to carefully assess market conditions and evaluate the potential risks before pursuing a bridge loan.

Tax implications of commercial bridge loans

When it comes to tax implications, you should consult with a professional tax advisor to understand the specific implications of commercial bridge loans. The tax treatment may vary depending on factors such as your business's structure, intended use of the loan proceeds, and applicable tax regulations.

In some cases, the interest paid on a bridge loan may be tax-deductible, while in others, it may not be. It is important to seek expert guidance to ensure compliance with tax laws and to maximise potential tax benefits.

The pros and cons of commercial bridge loans?

Advantages of commercial bridge loans

• Quicker access to capital compared with conventional financing
• Deferred payment: you only pay the principal and interest payments when you’ ve sold the property
• Flexible terms: lenders are typically more flexible with their terms since the loan is temporary
• More accessible: this type of funding is easier to gain than conventional loans and mortgages

Disadvantages of commercial bridge loans

• Higher interest rates and potentially higher fees compared with conventional financing options (though these vary depending on the lender)
• Shorter-term: you  typically need to repay these types of loans typically need to be repaid quickly
• Collateral: borrowers need to give sufficient collateral to guarantee the loan

‍How to apply for a commercial bridging loan

Applying for a commercial bridge loan typically involves a thorough assessment of your business's financials, property valuations, and loan requirements. Different lenders may have slightly different processes, but in general, you will need to give them documents like financial statements, business plans, property appraisals, and information about how you plan to use the loan money.

It is advisable to shop around and compare loan offers from different lenders to ensure favourable terms and conditions. Engaging the services of a mortgage broker or financial advisor can also be beneficial in navigating the application process and securing the best possible deal.

Navigating the process of obtaining a commercial bridge loans

Navigating the process of obtaining a commercial bridge loan can be made easier by following a few key steps. Firstly, businesses should thoroughly research lenders and evaluate their track record, reputation, and loan terms. It is important to choose a lender who understands the specific needs of the business and offers competitive rates and flexible repayment options.

Secondly, businesses should prepare all relevant documentation and ensure that their finances are in order. This includes accurate financial statements, property valuations, and any supporting documents that may be required by the lender.

Lastly, businesses should be proactive in their communication with the lender throughout the application process. Promptly responding to any requests for additional information or documentation can help expedite the loan approval and funding process.

‍Determining when a commercial bridge loans is right for you

Whether you're looking to expand your business, buy a new commercial property or renovate an existing one, a bridge loan can help. However, it's important to take the time to understand what bridging loans are and compare commercial bridge loan lenders.

‍What other solutions are available?

Before you explore bridging loan providers, check out our article on bridge finance.

Depending on your investment needs, you could consider alternative options such as an iwoca Flexi-Loan. We offer flexible short-term finance - up to £1,000,000 -  that gives you the option to repay early without any fees.  

‍In conclusion, a commercial bridge loan serves as a temporary financing solution for businesses looking to purchase a new property before selling their existing one. It provides the necessary capital to bridge the financial gap and allows businesses to proceed with their expansion or relocation plans. However, businesses should carefully consider the terms, interest rates, and repayment options associated with bridge loans to ensure they make a well-informed decision that aligns with their financial goals and capabilities.

Commercial Bridging Loan FAQs

Is a Bridge Loan Different to a Commercial Mortgage?

Yes, a bridge loan and a commercial mortgage serve different purposes and have distinct characteristics:

• Purpose: A bridge loan is a short-term loan used to bridge the gap between immediate funding needs and long-term financing, often for quick property purchases or urgent financial needs. A commercial mortgage, on the other hand, is a long-term loan used to purchase or refinance commercial property.
• Term Length: Bridge loans typically have shorter terms, ranging from a few months to a year, while commercial mortgages have longer terms, often 10 to 30 years.
• Interest Rates: Bridge loans usually come with higher interest rates due to their short-term nature and higher risk, whereas commercial mortgages generally offer lower, more stable rates.
• Repayment: Bridge loans are often repaid through the sale of the current property or securing long-term financing, while commercial mortgages are repaid over a longer period through regular instalments.

How Much Can You Borrow with a Bridging Loan?

The amount you can borrow with a bridging loan depends on several factors:

• Property Value: The loan amount is typically a percentage of the property’s value, known as the loan-to-value (LTV) ratio. LTV ratios for bridging loans usually range from 60% to 75%, but can vary based on the lender and the property.
• Lender Criteria: Different lenders have varying criteria and may offer different maximum loan amounts.
• Creditworthiness: Your credit history and financial stability can impact how much you can borrow.
• Collateral: The value of the collateral you provide will also influence the loan amount.

Are There Alternatives to Bridging Loans?

Yes, there are several alternatives to bridging loans that might be more suitable depending on your needs:

• Business overdrafts provide flexible, short-term access to funds but often come with higher interest rates.
• Asset finance allows you to borrow against business assets like equipment or vehicles.
• Invoice financing enables businesses to borrow against outstanding invoices.
• Property development finance is designed for funding property development projects, offering terms suited to longer project timelines.

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