Commercial bridging loans

Commercial bridging loans guide

A commercial bridging loan is used for a range of purposes and is focused on businesses looking for short-term finance, usually large figures from £50,000 through to £50 million.

Security will be required, usually as a second charge on an existing asset. This guide gives you everything you need to know about commercial bridging finance and how to get it.

How Does A Commercial Bridging Loan Work?

The primary purpose of a bridge loan is to hold you over financially during the period of time between making a purchase and securing longer-term financing. These are specialist commercial finance solutions for property and purchases with a clear exit strategy.

As a short-term loan, expect your term to last between several months and no longer than a year (although there are exceptions to this rule). There are usually no exit fees, or exit plan repayments required if the finance is paid off in the agreed term and you keep up repayments.

Commercial bridging loans are a bridging finance used to buy commercial property. Small businesses, partnerships, and individuals can apply for them. As well as large enterprises and limited companies.

These types of loans can serve as alternatives to mortgages. They can also be used to bridge the gap whilst you wait to get a mortgage. Interest rates for commercial bridging finance are usually higher than for commercial mortgages.

What Types Of Property Can I Use A Commercial Bridging Loan For?

A commercial bridge loan is a type of residential bridging loan used to buy commercial property. The types of commercial properties it can be used for include:

• Care homes
• Mixed-use property
• Hotels, B&Bs, and guest houses
• Pubs, restaurants, and bars
• Offices
• Professional practices
• Business parks
• Retail units
• Factories, warehouses, and industrial units
• Large HMOs
• Unusual residential investments
• Places of worship
• Commercial premises

What Are The Benefits Of A Commercial Bridging Loan?

Quick turnaround

Commercial bridging finance is ideal if you need quick access to funds. For example, you may want to buy a property at auction but haven’t got enough time to arrange a mortgage. Commercial bridging finance can supply you with the funds you need in the meantime.

These loans have a very quick turnaround time and can take days or weeks to arrange. Loan Corp can get you approved for a loan within just 24 hours.

Short-term

If you’re expecting to receive capital in the near future then a commercial bridging loan is a better idea than a mortgage. For example, you may be waiting for a property to be sold but need cash quickly. Most bridging loans are available for between 1 to 24 months.

Flexibility

Commercial bridging loans are much more flexible than mortgages. If you’ve been denied a mortgage you can usually still be accepted for a bridging loan.

If you’re buying an unmortgageable commercial property you could use a bridging loan to renovate it. In this case, a commercial bridging loan would be serving as a form of development finance.

Most commercial bridging lenders are far more flexible than mortgage lenders.

Security Required For Commercial Bridge Loans

As a secured loan, you’re required to put up an asset that you already own to reduce the risk to the lender, such as property or a retail unit for example.

For example, if you’re buying commercial property, you could use your personal home to secure the property. The risk with this is that the home may be repossessed if you default on the loan. Equally, an auction loan would be paid back within the agreed terms of the agreement signed for the short-term business loan.

On the plus side, development finance lenders often approve borrowers based on the value of their collateral, as opposed to their down payment, credit history, and/or credit score. So, with the right collateral, it’s easier to secure unregulated bridging loans when compared to most other types.

Who Is Eligible For Commercial Bridging Loans?

Lenders don’t lay out specific eligibility criteria for commercial bridging loans. They tend to be flexible with this. However, there are several factors they’ll consider before approving an application.

Credit history

An adverse credit history isn’t usually enough for a lender to reject an application. However, it may be viewed negatively in combination with other factors like your exit strategy.

Exit strategy

Your exit strategy is viewed by lenders as the most important factor in your application. If you’re planning to remortgage or sell your property they’ll assess how likely it is you’ll be able to achieve this.

They’ll consider things like the liquidity of the property market and the property’s location. They’ll also consider the renovation required for the property to be mortgageable.

Property experience

Your track record of selling and developing different property types will be considered. If your commercial bridging loan is for a complex project the lender may want to see evidence of previous relevant success.

Business finances

If you’re a business or a limited company, the lender may ask to see your business accounts. They’ll assess the profitability of your business based on the earnings. This is before tax, interest, and amortisation.

What Rates Should I Expect To Pay For Commercial Bridging Loans?

Most lenders price their loans based on risk. Generally, the best rates tend to start at about 0.39% a month. A good benchmark for commercial bridge loans is a 0.75% per month interest rate. If a loan is considered to be high risk then the rates will go up.

For instance, if you have an adverse credit history or you’re buying an unusual commercial property, the interest rates could be between 0.95% to 1.5% a month.

The best rates are usually given to applications with lower loan-to-value percentages. Loans with 50% LTV tend to get the best rates.

As well as paying interest rate charges there are other fees involved in commercial bridge loans, such as:

• Lender exit fee – these fees are less common these days but some lenders still charge them. They’re paid by the loanee once the loan has been repaid. They’re usually equivalent to one month’s worth of interest charges.
• Lender agreement fee – these are fees that lenders add onto the loan. They are usually between 1% to 2% of the full loan value.
• Valuation fee – the amount of this fee depends on the location, type, and value of the security property. It’s paid to a chartered surveyor who will then assess the property. This fee is paid towards the start of the application process by the loanee.
• Broker fee – the majority of brokers will ask for a fee for arranging your loan. It’s usually between 1% to 1.5% of the loan value.
• Legal fees – usually you’re expected to pay the legal fees for both you and the lender. Legal fees are usually paid in two installments. One is paid before the legal work begins and one is paid after it’s been completed.

Commercial Bridging Loans: Popular Uses

There’s no right or wrong way to use a commercial bridging loan. As long as you have a specific use in mind, along with everything necessary to qualify, you should be able to proceed efficiently. It’s usually more straightforward than development finance; however this depends on the lender and each case’s particulars.

Here are some examples in which commercial bridging finance could help your business and financial situation as a whole:

• Property: Maybe you find the perfect piece of property. And maybe you realise that it’s in high demand. Rather than wait for mortgage approval, you want to take fast action. There’s where a commercial bridging loan can help. Since receiving funds in short order is easier, you minimise the risk of missing out on the property.
• Moving your business: Moving your business from one location to another is never easy. From a logistics point of view, you’ll soon find that it’ll set you back quite a bit of money. Not only can you use a commercial property bridge loan to purchase your next space, but it can also help with other moving expenses.
• Maintenance and renovation: If you already own property and want to hold onto it, maintenance and renovation costs may soon move to the forefront. Bridging loans can be used for anything and everything on this front, such as replacing the roof, upgrading the electrical system, or removing walls to make room for a more open workspace. These are commonly known as refurbishment loans for both domestic and commercial use.

Along with the above, if your business credit score is less than desirable, a bridging loan may be just what you need.

This allows you to make your purchase and increase your score in hopes of securing more permanent long-term financing. You need to be aware of many pros and cons of bridging loans when looking into commercial bridging.

Tip: know your credit score before applying for a bridging loan. This will give you a better idea of if a bridging lender is your only option as you can get bridging loans with bad credit if you have issues with your credit rating.

Do You Qualify For A Commercial Bridge Loan?

If you’re interested in applying for a commercial bridging loan, it’s critical to understand the eligibility requirements and qualifications you must meet.

While this varies from one lender to the next, there are some basic requirements to keep in mind:

• The value of the collateral is a big deal: When it comes to bridging finance criteria, this is one detail you can’t forget. If you don’t have something of value to secure your loan, you’ll find it difficult to receive approval. Lenders consider the best customers those with the property they’re willing to use as collateral.
• Loan to value comes into play: It differs by lender, but most bridging finance loans are capped at 80 per cent of the property’s value.
• Lender specific requirements: Every lender has its own requirements, which is why shopping around is so important. For example, if you’re buying a commercial property, your lender may consider any active liens, the condition, and the location.

Note: lenders will also look into your background to determine if you’re a credit risk. For example, if you’ve defaulted on funding in the past, have filed for bankruptcy, or have a foreclosure history, it’ll make it more difficult to secure a loan.  Read more: Bridging finance example

What Are Commercial Bridging Mortgages?

A commercial bridging mortgage is used to secure a commercial mortgage at the end of the loan term. The loan would serve as a temporary bridge until you’re able to qualify for a commercial mortgage.

These loans are useful if you’re currently ineligible for a mortgage. They can be used when you have bad credit or are waiting to recoup your gains from an investment.

The bridging loan can be used to buy a property in the short term. You can then arrange the mortgage for it later on.

You could choose to use the same specialist bridging loan lender for both the loan and the commercial mortgage. Or, you could use a different lender for each if this makes the rates better.

What Amount Can I Borrow With A Commercial Bridging Loan?

Different lenders have different amounts that they’re willing to loan. Many lenders will have £25,000 as their minimum loan amount. However, some will have lower minimums. The maximum loan amount a lender is willing to lend is usually fairly flexible.

The maximum amount a lender is willing to loan usually depends on several factors. These include the property’s location, its type, your exit strategy, and the market for such properties.

Lenders are relatively risk-averse and will only lend out very large amounts if they think it’s safe.

If the sale of your property is your exit strategy then the lender will need to assess your property. They’ll try to determine the demand for properties like yours and how quickly they think they can sell the property if needed.

If the lender determines that it’s unlikely a buyer could be found during the term of the loan, you’ll probably be offered a lower LTV.

If your exit strategy involves refinancing to a commercial mortgage then the lender will want to be sure your mortgage is achievable. They’ll investigate the likely maximum loans on a commercial mortgage. They’ll usually grant a loan with the same value.

If you want a loan higher than that amount you’ll have to cover the difference.

What Information Do I Need To Apply?

• Property details
• Details about you or your business
• Lease copies if the property is let
• Details of your exit strategy and proof that it’s viable

Things To Consider When Applying For A Commercial Bridging Loan

There are a number of things to consider before you apply for a commercial bridging loan. These include:

• The interest rates for these loans are higher than for other types of loans.
• If your strategy to exit the loan fails your property might be repossessed.
• There are other fees involved such as exit fees, valuation fees, and legal fees.
• If you want to refinance the loan the costs can be high.
• Commercial bridging non-regulated loans aren’t overseen by the FCA.

Popular Terms Of Commercial Short Term Finance

No two bridging loans are the same, so don’t assume that the terms and conditions of one lender will hold true with another. Read the fine print and ask questions before you sign on the dotted line.

For instance, interest rates can vary greatly. When all else is equal, you’re likely to choose the lender with the most competitive rate.

Here are some of the common terms and conditions associated with this type of business loan:

• Loan amount: Commercial bridging loans generally range from £1 million to £10 million. However, you may find lenders that offer a lower or higher loan amount.
• Interest rate: Expect somewhere in the 10 per cent or higher range. Not only do bridging finance rates vary from lender to lender, but it also depends largely on your collateral, credit score, and history. Knowing your interest rate upfront will help you budget for future loan payments.
• Loan terms: Most bridging loans are for 6 to 12 months. This is short-term, so some lenders may be willing to expand.
• Fees: Another detail that can vary greatly includes but is not limited to legal fees, arrangement fees, escrow fees, title fees, and the appraisal fee. Some lenders even charge an early repayment fee.
• Repayment: You take out a bridging loan with the idea of paying it back based on the terms and conditions. The repayment conditions are outlined in your loan documents. Here, you’ll find out what type of loan you have. The most common are fixed monthly payments, interest-only payments with a balloon at the end, and a one-time repayment at the end of the predetermined term.

If you have any questions about the terms and conditions of a bridging loan, clear the air before proceeding. You don’t want to agree to something that will negatively impact your situation in the future. If you are getting commercial overseas bridging finance, you must get a professional proofreader to read any contracts in languages you do not speak fluently.

Use A Commercial Bridging Loan Calculator

If you’re interested in comparing bridging loans, it helps to use a bridging loan calculator. Benefits include:

• The ability to play around with the numbers before applying
• A better understanding of how much money you’ll pay every month
• A clear idea of how your interest rate affects your monthly payments and overall cost

For example, property investors can benefit from using a development loan calculator, as it gives them a sound understanding of what they’re getting into if they secure a loan. It also helps them calculate their potential return on investment (ROI).

Commercial Bridging Finance Lenders

If you want a bridge loan for commercial property purchases you’ll need to find a specialist lender. These lenders usually arrange commercial bridging finance based on the duration and size of the loan. This means you’ll need to find a lender with the right type of loan for you.

Commercial bridge loans aren’t regulated. This means that they’re not overseen by the Financial Conduct Authority (FCA). Lenders also aren’t required to carry out affordability assessments. However, most lenders will still do this to reduce the amount of risk.

Being unregulated means that commercial bridging loans are very flexible. It also allows lenders to tailor them to your needs. This means that each loan is bespoke and based on the circumstances of the loanee.

There are several things you can do to get the best rates from a lender:

• Work with a specialist in bridging finance. A good broker will have strong relationships with lenders. They can use their industry knowledge to negotiate the best rates possible.
• Put down a big deposit. Generally, lenders will offer loans with a maximum loan-to-value (LTV) of 75%. If you pay a large deposit and have a low loan-to-value you should get better rates.
• Use additional security. You can use the property you’re buying as your security property. If you secure the loan to an additional property as well, you might get better rates.

Commercial Bridging Loans: Start Here

Now that you know more about these bridging loans, you can make a final decision as to what you should do next.

Maybe you compare bridging finance loans from several lenders. Or maybe you consider if another type of loan, such as a loan to buy land makes more sense.

If you’re ready to start your search, there are a few places you can turn:

• Online broker: When you work with an online broker, you gain access to the largest network of lenders. Furthermore, your broker does all the work on your behalf. You have to compare lenders and loan terms. Tip: ask about any broker fees upfront.
• Contact a bank or credit union: For example, if you already have a relationship with a local bank or credit union, contact them to ask about the many types of loans they offer. It’s important to compare bridging loans from banks as they can vary so much with their rates.
• Private commercial, and financial services companies: These companies aren’t in the same category as banks and credit unions. They work independently, thus allowing them to avoid some red tapes that often slow down the application process.

FAQs

Do commercial bridging loans affect your credit score?

Your credit score is affected by the number of recent applications for loans you’ve made. If you apply for a bridge loan and are rejected then this will show up on subsequent credit checks. After a period of time, it will no longer appear in credit checks.

What are semi-commercial bridging loans?

Semi-commercial bridging loans are different from commercial and residential bridging loans. They’re used for buying mixed-use properties such as a flat above a shop. These types of properties aren’t deemed to be either strictly commercial or residential.

So, semi-commercial loans are needed to purchase them.

How long does it take for a bridging loan to be approved?

On average, it takes between 72 hours to 2 weeks for a bridging loan to be approved. It can then take a little while for you to receive the cash. At Loan Corp, we get loans approved within 24 hours.

Final Thoughts

A commercial bridging loan is an ideal choice for individuals and businesses looking to buy a commercial property. It’s the perfect short-term solution if you need funds quickly while waiting for capital to be released.

Lenders are very flexible and your application won’t usually be rejected for things like a poor credit score. You also won’t have to wait long for your loan to be approved and the cash to be received.

The amounts lenders will loan you are also pretty flexible. Generally, whatever amount you need, you’ll be able to find a loan that’s right for you.

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