Bridging Loans

A bridging loan is a type of short-term business finance designed to get you from A to B by ‘bridging a gap’ in your finance. It’s commonly used by property buyers and investors but is suitable for a range of other purposes. When you take out the finance, the lender will usually have a first or second legal charge against your property. 

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Bridging Loans

What is a bridge loan?

A bridge loan is a type of short-term financing (typically 12 months or less) that provides you with an immediate cash boost while you wait for longer-term funding. Used to "bridge the gap" financially, bridge loans are used by people who want to buy a property but are yet to sell their current home, in addition to other transaction types that we will discuss below.

If you decide to take out a bridge loan, you can do so from traditional lenders, such high street banks or through a finance marketplace such as Funding Options. Keep in mind that it will be secured against an asset, such as your property. If you don't meet the repayments, your home could be at risk. Let's take a closer look at how bridge finance works. 

How does a bridge loan work?

A bridge loan works and can come in useful if you're buying a property and are waiting for the sale of an existing one to complete. In this instance, you could use the loan to cover the period between buying the new property and selling the old one. Short-term finance can also be used if part of the chain falls through.

You can also use a property bridging loan to:

Bridge loan examples

Individuals, property developers and businesses can all use bridge loans. To the business-minded, here's an example of how the process could work with a company that wants to move to new commercial premises. 

1. A company is moving and wants to purchase a new commercial property

2. A deposit is required, and the rest will be borrowed through a mortgage

3. The company can cover the majority of the deposit but needs more cash

4. It's waiting for the sale of its current premises to go through

5. The company takes out a bridge loan to ‘bridge the gap’ and cover the remaining deposit amount

6. The loan and interest are repaid when the current premises are sold. 

In most instances, the borrower can add the loan's monthly interest payments to the balance of the loan and pay everything off at the end of the term. 

Bridging finance is designed, typically for short-term financing, is a type of business loan similar to secured loans. You'll need to meet the lender's eligibility criteria and have a valid "exit". An exit refers to how you're going to repay the loan and interest in whole or plan to move it onto a more permanent type of finance, like a mortgage.

Some businesses use bridge finance when they need a quick working capital boost. A startup, for example, might seek out a bridge loan when it's waiting for its equity financing round to close, using the cash to fund operational costs such as payroll, inventory, rent, utilities and any other business expenses.

Other businesses use bridge finance to take advantage of time-sensitive inventory offers. If you have a robust credit history, equity, a way of paying off the loan and security, it's possible to be eligible for a property bridging loan even if you have a poor credit rating (though be sure your business is registered in England and Wales).

If you’re unsure your application for a bridge loan will be accepted, why not try our business loan calculator below to find out how much you could borrow (and afford to borrow) before beginning an application.

Business Loan Calculator

The pros and cons of bridge loans

As with all types of finance, it's essential to understand and weigh up the advantages and disadvantages to determine the right choice for you

Bridge loan pros

  • Flexibility - Bridge loans can provide you with flexibility when purchasing a property. You can also choose from fixed or variable interest rates and open or closed loan terms.

  • Speed - You can get fast access to cash, and bridging loans can be ready in 24-48 hours, much quicker than some term loans. 

  • Amount - Because a bridge loan is secured against the borrower's asset, it's possible to borrow a larger sum of money than other finance types.

 Bridge loan cons

  • Interest rates - Bridging loans are short-term, so they tend to come with higher interest rates. Interest on bridging finance is usually calculated monthly as opposed to annually. 

  • Fees - There are other costs, such as arrangement and exit fees.

  • Risk - As with other types of secured finance, your property - or other assets - will be at risk if you don't meet the loan repayments. 

How much does a bridge loan cost?

The interest rates attached to bridge loans can be higher than traditional term loans, and interest is typically worked out monthly instead of annually. Depending on the lender, you may be able to arrange for the interest rates to be "rolled up" so that you pay them along with the loan amount at the end of the term. 

You should expect to pay a fee for the arrangement of the loan and administration fees. The team at Funding Options can explain any complex terms and conditions so that you know what to expect. 

Like most loans, bridge loan interest rates can be fixed or variable. If the interest rate is fixed, it remains the same for the duration of the loan term so that monthly payments will be consistent. If variable, the interest rate can fluctuate. Usually, the lender will set the variable rate in line with the Bank of England base rate. 

Bear in mind that if you still need to pay off your mortgage, you can end up having to make both a mortgage payment and a bridge loan payment until your previous home is sold. Although interest is the main cost, you should also consider:

  • Arrangement fees - Usually between 1-2% of your borrow.

  • Broker fees - Applicable if you use a broker to find bridging finance.

  • Exit fees - Some high street banks charge around 1% of the loan amount.

Types of bridge loans

First or second charge

If the property you're securing the loan against doesn't have any other loans secured against it, you'll get a first charge bridging loan. If, for instance, you already have a loan against the property in the form of a mortgage, your loan will be the second charge. 

Fixed or variable interest

Bridging loan interest rates can be fixed or variable. You'll know exactly how much you'll be charged with a fixed rate, and monthly repayments will be the same. While fixed rates tend to be more expensive, variable interest rates can change. 

Open or closed  

An open bridge loan means there's no set a date for paying off the loan, but you'll usually be expected to pay it off within a year. This type of loan may suit you if you've found a house you want to buy but haven't yet sold your current home

Closed bridge loans have fixed repayment dates. This type may suit you if you're selling a property and are waiting to receive the money to put towards a new one.

How can I apply for a bridge loan?

Authorised and regulated by the Financial Conduct Authority, you can use the Funding Options platform to find a bridging loan. The process is quick – you'll typically receive a decision within 24 hours. Just tell us how much you need to borrow and what it's for, and our technology will compare 120+ lenders to match your business with the right finance options for its needs.

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