Commercial Bridging Loans Explained

Find out how this type of loan differs from a mortgage, the advantages and disadvantages, and how to get the best rates. We’ll explain it all in this article.

What is a commercial bridging loan?

Commercial bridging loans are a type of short-term financing used to buy commercial property or a plot of land, such as office space, retail units, hotels, or warehouses. They are available to individuals, partnerships, small businesses, limited companies, and large enterprises.

Bridging loans can be used as an alternative to a mortgage or to bridge the gap until you’re able to get a mortgage. Though the interest rate will usually be higher than a commercial mortgage, they do offer several benefits:

Short term

If you expect to receive capital imminently, e.g. you are waiting for the sale of another property to go through, a bridging loan might be better suited to your needs than a mortgage. They’re usually available for anything between one and 24 months, although some lenders will consider up to 36 months.

Fast turnaround

If you need fast access to funds, e.g. you are buying a property at auction and don’t have time to arrange a mortgage now. A bridging loan can buy you some time. They can usually be arranged within days or weeks.

Flexible requirements

If the property you’re buying is unmortgageable, e.g., derelict, a bridging loan could allow you to carry out repair work before you can secure a mortgage.

Or, if you don’t qualify for a mortgage, e.g. you can’t meet the income requirements, a bridging loan may still allow you to proceed with the property purchase.

What commercial bridge loans can be used for

These are a few of the scenarios (not all) in which a bridging loan and a commercial mortgage can work together.

• Property auctions: If you’re buying a property at auction, a business mortgage could take too long to arrange.
  Taking out a bridging loan would give you the funds to secure the property, and refinancing onto a commercial mortgage later would give you an exit strategy.
• Unmortgagable properties: Let’s say you have the capital and expertise to turn an empty building into a commercial premises.
  Some lenders might turn you down for a mortgage on a building that is in disrepair, but bridging finance providers can be more flexible. You could buy the property with a bridging loan, carry out the repairs and then take out a commercial mortgage based on its increased value for the exit.
• Chain breaks: Some commercial property owners might need to sell a property before they can buy a new one. Both deals are in motion, but the sale of their existing premises falls through, stopping the purchase. A bridging loan could give you the means to keep the deal alive, and the exit strategy could be either selling your previous property or refinancing the funds onto a commercial mortgage on the new one.
• You have short-term credit/cashflow problems: Let’s say your current credit/income situation makes you ineligible for a commercial mortgage immediately, but these problems will be rectified within months. A bridging loan would allow you to close a property transaction quickly, although you must prove in advance that you would qualify for a commercial mortgage to serve as the exit.

Lenders and eligibility criteria

Only a select few specialist lenders offer commercial bridging loans. Each lender usually only works with deals of a certain size and duration, so you’ll need to find one that’s a good fit for your project.

Commercial bridging loans are unregulated. This means that the Financial Conduct Authority (FCA) does not oversee them or require lenders to carry out an affordability assessment (though most lenders will do this anyway to avoid taking on too much risk).

It also means that these loans can be far more flexible and tailored to your needs. Rates are bespoke and individual, based on your needs and circumstances.

There is no set of specific eligibility criteria for commercial bridging loans, but lenders will look at the following factors before approving your application:

Exit strategy

By far, the most important factor in approval is your exit strategy. If your exit strategy is to sell the property or mortgage it to repay the loan, your lender will consider how likely you are to be able to do that.

As part of their assessment, they might consider the property’s location, how liquid that market is, or how much renovation the property will require before you can secure a mortgage.

Credit history

A good credit score is not necessarily essential if you have a strong exit strategy. However, your credit history could contribute to your approval or rejection in combination with other factors.

Business finances

You might need to submit your accounts if you’re applying for a commercial bridging loan as a business or limited company. Lenders will assess your profitability based on your earnings before interest, tax, and amortisation (EBITDA).

Property experience

Lenders will consider your track record in developing or selling property. If you are applying for a loan for an unusually complex project, they may want to see evidence of previous success managing similar work.

How to get the best possible rate

You’ll secure the best possible rate on your commercial bridging loan if you:

• Put down a large deposit. Bridging loans are usually available up to a loan-to-value (LTV) of 75%, but if your LTV is low, e.g. 50%, you’ll usually be offered a much lower rate.
• Work with a bridging finance specialist. Brokers often have strong relationships with commercial bridging lenders and can use their knowledge of the best available rates to negotiate on your behalf.
• Offer additional security. You can secure a bridging loan on the property you plan to buy, but you can also secure it on another property in your portfolio, which might get you a better rate.

How much your loan will cost

Using our calculator below, you can get a rough idea of the repayments on your commercial bridging loan.

Commercial bridging mortgages

A commercial bridging mortgage is an agreement in which a bridging loan is used to secure a commercial mortgage at the end of the term. The bridging loan would tide the borrower over until they are in a position to qualify for a commercial mortgage.

You might choose one of these arrangements if you are ineligible for a business mortgage in the short term. Perhaps you have bad credit that will be settled in a few months or are due to recoup a significant amount of money from an investment in the near future.

A commercial bridging loan could help you secure your property in the immediate term, giving you time to arrange the mortgage later.

You could use the same lender for the bridging loan and the commercial mortgage or different ones if the rates available are more favourable that way.

Other things to consider

Before you apply, you should be aware of the following considerations and risks:

• Interest rates for this type of financing can be very high
• There are other potential costs involved, including arrangement fees, exit fees, and valuation fees
• If your exit strategy fails or is delayed, the property you have secured the loan on could be repossessed
• To avoid this, you might look at refinancing the loan, but there can be high costs associated with this
• Because commercial bridging loans are unregulated, you don’t have FCA protection

Speak to an expert in commercial bridging loans

Because this type of financing is so specialist, it’s best dealt with through an experienced bridging finance broker with extensive knowledge of the market and strong relationships with numerous lenders. If you hope to secure a commercial mortgage later, it’s sensible to choose a broker who can also help you at that stage.

Naturally, brokers with this level of experience are few and far between, but we work with a number of them. By using our broker-matching service, you can be sure that you’ve been paired with someone with the exact skills and expertise that you need.

To find your perfect match and start with a free, no-obligation chat with a commercial bridging loan expert, just call us today on 0330 818 7026 or make an enquiry online