Bridging is a form of temporary financing intended to cover a company’s short-term costs until long-term financing is secured. Thus – it’s named bridge financing since it is like a bridge that connects your company to debt capital through short-term borrowings.
Commercial bridging loans are most frequently used to address the shortfalls in development projects, or when buying an asset – and you’re waiting to be approved for the finance for the asset. They are best suited to circumstances that demand speed and flexibility in the use of the funds and flexible repayment terms.
Often during the term of the loan, the interest is ‘rolled’ into the loan and repaid at the end of the term (the final date of the agreement). As such, there are no monthly repayments to make – keeping the pressure off your monthly outgoings and allowing you to budget for the repayment date to ensure you are able to repay the funds.
Key benefits of commercial bridging finance
Speed
Bridging loans are fast to arrange compared to traditional loans. They are designed to provide you with a short term injection of funds to ‘bridge the gap’.
Flexibility
Whether buying a property quickly or waiting for funds to come through for a renovation, bridging loans are flexible with regards to how they can be used and repaid.
Short term solution
Bridging loans are designed to be repaid in a short time frame. This means you don’t tie your business into long term debt with bridging finance, as you may with a conventional business loan.
Access to larger deals
With the correct bridging finance, you may be able to secure larger commercial properties that may not be accessible with a traditional loan due to their more timely application process.
Flexibility with bridging loans
Unlike in traditional borrowing, there is flexibility on how you choose to repay the loan. This does depend on how strong your credit is, if you have weak credit the lender will likely decide how you pay back the interest.
Furthermore, bridging loans have interest rates quoted as monthly due to their short term nature, and most lenders will only charge you interest on the months that your loan is outstanding. For instance, if you take out a 6 month bridging loan but you pay it back in 3 months, you’ll only have to pay 3 months worth of interest.
Drawbacks of commercial bridging loans to consider
Short repayment terms
Bridging loans are a short term financial product. Typically, their terms are up to ~18 months (dependent on a number of factors such as when you foresee longer-term funds becoming available). Lenders will want to see you demonstrate a plan for paying the loan back, this is known as an ‘exit plan’.
Higher interest rates
Bridging loans often come with higher interest rates when compared with traditional loans.
How is interest repaid in commercial bridging loans?
Borrowers have a number of different options compared to conventional loans and commercial mortgages. There are 3 common methods for repaying the interest on bridging loans:
Rolled up interest
With rolled-up interest, you pay the total accrued interest at the end of the term. Every month, interest accrues at a pre-agreed rate set by the lender. At the end of the term, you pay the interest and the loan amount in one payment.
Monthly interest rates
Similar to your standard mortgage, you pay the interest payments monthly at a set rate. Bear in mind, you are only paying the interest – this does not reduce the capital borrowed; this is repaid at the end of the term in a lump sum.
Retained interest
Your maximum interest payable is included in your original loan value. At the end of the term, you repay your loan in full including any interest accrued. You’ll only be charged interest on the months where the loan was outstanding, meaning if you repay a retained interest bridging loan early, you could be entitled to a refund on the months you did not accrue interest.
Depending on the strength of your credit profile, lenders may let you decide how you repay the interest. If you have weak credit, it is likely the lender will set their own interest repayment conditions.
Frequently Asked Questions
How much money can I borrow in commercial bridging loans?
The amount you can borrow with a commercial bridging loan is usually determined by the value of the property used to secure the funding. Every finance application is different, so it’s best to speak with a trusted broker who can guide you.
Do I need a salary for a commercial bridging loan?
Bridging loans often do not require a salary, as there are no monthly repayments with bridging loans. However, it is likely you will need to present your financial history to lenders to demonstrate your business’ ability to generate money.
Do commercial bridging loans affect my credit score?
Your credit score may be impacted if you have difficulty paying your bridging loan back. Speak to your financial advisor or a solicitor when considering taking out a bridging loan. If you have a less than favourable credit history, it may be more difficult to qualify for a bridging loan.
How long do you pay bridging loan interest for?
Most lenders will only charge you interest on the months that your loan is outstanding. For example, if you take out a 6 month bridging loan but you pay it back in 2 months, you’ll only have to pay 2 months worth of interest.
What is a drawdown option in bridging loans?
Some lenders offer drawdown options, meaning you receive the money in stages that reflect your business’ need for the funding. For instance, if you are refurbishing a restaurant and you take out a £250,000 bridging loan with drawdown options – you won’t be able to spend that full £250,000 on day one. Instead, the lender will provide funds in stages. You may take £100,000 upfront, £100,000 when you have completed half of your refurbishments, and the final £50,000 as and when it is required to finish the project.
Conclusion
Bridging loans can provide your business the short-term injection of funds it needs, with flexibility in where you deploy the money. In contrast to most traditional loans, typically with bridging finance you are rewarded if you pay back the loan early. Additionally, bridging often serves as a route to accessing larger deals or commercial properties. A useful, unique type of commercial loan that can project your business to new growth possibilities without the need to wait for long-term financing. To speak with a broker who understands commercial finance, get in touch with Mill Wood.
