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 they 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.

They 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 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 as a result, whether or not the loan is regulated by the Financial Conduct Authority.

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 a building to secure the borrowing against or even planning permission for future plans 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 being purchased or renovated. The loan is typically repaid within 3-18 months, once the property 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 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?

To successfully apply for a commercial bridging loan, Yyou typically need to have experience either in commercial property investment or, if you are investing in a property you will run your own business from, experience in that industry. 

You will also need a deposit of at least 25%-30% of the property value (and sometimes more, depending on the case).

Each lender will have specific requirements (called ‘criteria’) that you have to meet. A broker can help by matching you to an appropriate lender and deal.

What information will you need to provide with your application?

To apply for a commercial bridging loan, you will need to provide information about the property being purchased, your financial circumstances, and if you are an owner-occupier, details about your business and its financial history. The lender will also need to assess your ability to repay the loan.

The application process can be very fast, some lenders are able to provide funding as quickly as you need the funds. An average completion timeframe would be 4-6 weeks. 

Choosing a suitable 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 a loan.

It's also important to consider the reputation of the lender, which you can assess to some extent by looking at reviews, and the lender’s website to see how established they are. A broker will only work with reputable lenders and will also know the service levels and turnaround times of the lenders, which can be a helpful inside track to ensure a given lender is likely to meet your needs. 

Whilst a commercial bridging loan itself is not regulated by the Financial Conduct Authority (the regulator for UK financial services), 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. 

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: In the right circumstances it can be possible to complete a commercial bridging loan application within a matter of days, which is helpful if you need to complete a commercial property transaction quickly.

Flexible repayment terms: there are two ways of repaying this type of loan. You either make monthly payments, or you repay it in full at the end of the term. If you pay monthly this is called a ‘serviced’ loan. If you pay at the end of the term this is called a ‘retained interest’ loan. Taking a serviced loan typically allows you to borrow more than a like for like ‘retained interest’ loan.

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

No early repayment fees: Some lenders do not charge early repayment fees, which gives you more flexibility to repay the loan early without penalty, if you want to or are able to.

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.

Ready to apply?

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.