A bridging loan is a short-term financing that helps bridge the gap in funding for a property purchase or a development project when you do not have enough money available. These loans are aimed at funding both residential and commercial projects.
When you use a bridging loan to buy a commercial property, it is addressed as a business bridging loan. Whether you want to move to a new office or you want to buy a commercial property at an auction, you will need bridging loans when money available to you has fallen through.
You can use bridging loans for other business purposes as well, such as if you need a quick working capital boost. You can also use these loans for your start-up to cover your operational costs.
Although you can use a standard business loan to buy a commercial property, commercial bridging loans pave the way for quick access to cash. However, these loans are subject to collateral and therefore known as secured business loans.
The term of business bridging loans cannot last more than 12 months, and therefore, your chances of approval are high when you have an exit plan. It means a strategy for how you will pay back the loan – by refinancing or selling the property.
How does a bridging loan work for your business?
Business bridging loans work the same as any other regular secured loans. The value of the asset you put down as collateral decides how much you will be able to borrow. The collateral you put down can be either a residential property or commercial assets. Whatever asset you use as collateral should be worth a higher value. Note that bridging loans for business are available at a high-interest rate.
Your bridging loan could be opened or closed. The main difference between an open and a closed bridging loan is the exit strategy. Open bridging loans do not require an exit strategy. It means it is impossible to set the deadline for the completion of the work. It means that you will not have a buyer ready for your existing property or a confirmed date of sale. For closed bridging loans, you will need an exit strategy. Your lender will already know how the borrowed sum will be paid back.
First and second charge bridging loans
When you take out a loan, you will have to put down your assets as collateral that your lender can seize in order to recoup their money in case of a default. The same scenario goes with commercial bridging loans. It is not necessary to have a business asset to serve the purpose of collateral. Your lender might ask you to put down your personal assets as well.
However, there are scenarios when the same asset serves the purpose of collateral for many lenders. For instance, if you would secure your loan against your house or office building, it is likely that it is secured against your mortgage as well. In case of default, the order in which lenders are paid back depends on the priority of charge.
If your commercial bridging loan is the only loan secured against your property, your lender will have the right to repossess your asset to get their money back when you make a default. In that case, this is called a fixed-charge bridging loan.
However, it will be classed as a second charge bridging loan when there is another loan against the secured property, such as a mortgage. It means that your lender will be second in the queue in order to get money from the liquidation of that property in case of a default. Therefore, these loans are highly risky for lenders.
Key points
- Interest rates for the first-charge bridging loans will be lower than those for the second-charge bridging loans as they are less risky for your lender. They can quickly seize your secured asset to get their money back.
- You are more likely to borrow a larger sum when your bridging loan is first charged. However, your lender will restrict the sum of money when you are taking out a second-charge bridging loan.
How costly are business bridging loans?
Business bridging loans are short-term loans, so the interest rates will remain fixed throughout the repayment term. However, there are some lenders that have an option of variable interest rates.
As far as it is about how much they will cost you, it depends on the interest rates you are charged and associated fees. There are a lot of factors that determine how much interest you will be charged such as:
- The loan amount
- The length of the loan term
- Your loan-to-value ratio (the difference between the current value of property and the projected gross development value)
- Your credit score (not always required)
In addition to interest, you will have to pay arrangement fees. A typical arrangement fee includes 1% to 2%. You will keep paying interest until the end of the term, but you will have a scope for rolling up your interest for the full repayment term that adds to the capital.
There is no clause for early repayment fees, meaning you are absolutely free to pay off early if your project is over and you have money. Your lender will pay back to you the interest for the loan term you do not use when you roll it over for the entire term.
Some lenders will charge exit fees as well paid back along with capital at the end of the term. Bear in mind that exit fees vary like arrangement fees. It depends on the size of the total loan.
The bottom line
If you are looking to choose a business bridging loan, you should carefully do proper research to save your money on interest and fees. It is a good idea to choose a bridging loan broker. They will help you introduce you to a lender that matches your requirements. You can save your time in research work and choose the best deal. For more such informative articles, visit here.
