A guide to commercial bridging loans

If you need quick and short-term funding for your business, a commercial bridging loan might be a good option for you. This guide will explain what commercial bridging loans are and how they work.

What is a commercial bridging loan?

A commercial bridging loan is a short-term loan that is used to finance commercial property transactions. These loans are typically used to bridge the gap between buying a new property and selling an existing one.

Commercial bridging loans can also be used to fund other types of commercial projects, such as refurbishments or renovations, or to cover cash flow shortages.

What is the difference between residential and commercial bridging loans?

There are two types of bridging loans: regulated and unregulated.

• A regulated bridging loan is when someone borrows money to buy or renovate a house they plan to live in. This type of loan is regulated, which means that the government has rules in place to make sure the person borrowing the money is subject to consumer financial protection, as they are not expected to know how these products work in detail.
• An unregulated bridging loan, on the other hand, is when someone borrows money to buy a property that they plan to rent out (either as home or business premises) or sell on, with no plan to live in it themselves. This type of loan is unregulated, because they are intended to be used by people familiar with the nature and risks associated with borrowing money in this way.

In summary, the main difference between the two types of bridging loans is what the property will be used for, and whether or not there are government rules in place to protect the person borrowing the money.

What type of property can I buy?

Commercial bridging loans refer to an unregulated bridging loan secured against a business premises. They are broadly suited to any business property e.g.

• Offices
• Retail units
• Warehousing and storage facilities
• Pubs, restaurants and cafes
• Cinemas, theatres
• Manufacturing facilities
• Educational facilities
• Civic buildings
• Transport depots, yards, garages

The only exception is buying a piece of land where there is no permanent building to secure the loan against, and there are no plans to build one.

For example, a fishing lake with no buildings on the land at all and no intention to build any property on that land would not be suitable security for a commercial bridging loan.

This is because, without planning permission to build on the land, the value of the land itself is limited.

How do commercial bridging loans work?

Commercial bridging loans work by providing the borrower with a lump sum of money that is secured against the property or asset being purchased or renovated. The loan is typically repaid within 3-18 months, once the property or asset has been sold, or the borrower has secured longer-term funding (e.g. a commercial mortgage).

The amount of the loan is usually based on the value of the property or asset being purchased, as well as the borrower's ability to repay the loan. Commercial bridging loan interest rates are typically higher than traditional bank loans, reflecting the shorter-term and higher-risk nature of the loan.

Who can apply?

You need to be 18 years old or more and have a deposit of at least 20% of the property value (but typically more) to take out a commercial bridging loan. Each lender will have specific requirements and a broker can help by matching you to an appropriate lender and deal.

Applying for a commercial bridging loan

To apply for a commercial bridging loan, you will need to provide information about the property or asset being purchased, as well as details about your business and its financial history. The lender will also need to assess your ability to repay the loan.

The application process for a commercial bridging loan is typically faster than traditional bank loans, with some lenders able to provide funding within a matter of days. This can be helpful if you need to complete a commercial property transaction quickly.

Choosing a commercial bridging loan

When choosing a commercial bridging loan, it's important to consider the interest rates, fees, and repayment terms. Some lenders may charge additional fees, such as arrangement fees or exit fees, so it's important to read the terms and conditions carefully before agreeing to the loan.

It's also important to consider the reputation of the lender and to make sure that they are regulated by the Financial Conduct Authority (FCA).

Whilst a commercial bridging loan itself is not regulated, typically a lender offering one should be, because they are dealing with consumer credit. The only exception would be where a lender offers absolutely no regulated services but these tend to be few in number.

So, by establishing whether the lender is FCA regulated (as opposed to the bridging loan itself) this will help to ensure that you are dealing with a reputable organisation who follows strict rules and guidelines.

Working with a reputable, specialist broker who has access to a wide range of lenders, representative of the UK marketplace can help you. The broker will find you a deal from potentially thousands on offer, based on your needs and circumstances.

As well as knowing about available deals, a broker will have wider insights on other factors, such as lender service standards, lender reputation, underwriting processes and more.

Benefits of commercial bridging loans

Commercial bridging loans can provide a number of benefits, including:

Quick funding: Commercial bridging loans can provide funding within a matter of days, which can be helpful if you need to complete a commercial property transaction quickly.

Flexible repayment terms: Commercial bridging loans typically have more flexible repayment terms than traditional bank loans, which can help to ease cash flow shortages.

Access to larger sums: Commercial bridging loans can provide access to larger sums of money than traditional bank loans, which can be helpful for larger commercial projects.

No early repayment fees: Some lenders do not charge early repayment fees, which can be helpful if you are able to repay the loan earlier than anticipated.

Drawbacks of a commercial bridging loan

As mentioned above, commercial bridging loans are not regulated by the Financial Conduct Authority, so as a borrower you are not protected in the same way you would be if you were investing in a regulated mortgage or loan.

This means you should carefully consider if this type of borrowing is right for you and be certain you can afford to repay the loan. If you cannot, your property may be repossessed by the lender and sold, in order to cover your debt.

Bridging loans are typically more expensive than mortgages. They are only meant to be used for a short period of time as a result. Make sure you know how you are going to repay the loan, by either taking out another form of long term borrowing (e.g. a mortgage) or by selling the property for a sum of money that will cover your debt.

Conclusion

Commercial bridging loans can provide a quick and flexible source of funding when you need need short-term financing.

When choosing a commercial bridging loan, it's important to consider the interest rates, fees, and repayment terms, as well as the reputation of the lender. By choosing a reputable lender and carefully considering the terms and conditions of the loan, you can help to ensure that your business has the funding it needs to succeed.

For help in securing a commercial bridging loan, with the peace of mind of a specialist broker working on your behalf, contact Commercial Trust today.