A guide to bridging loans and bridging finance

28 Apr 2020

A bridging loan is a type of short term business loan designed to ‘bridge a gap’ in a business’ finance. In other words, it helps you get from one point to the next until you can either secure longer term finance or clear the loan in full.

overhead view of city houses

Why use bridging finance?

  • Quick, seamless process

  • Can be used for any legal business purpose

  • Non status – products available regardless of credit profile/score 

  • No exit fees 

  • No income issues as the lenders can provide a retained facility which means the interest is added on the loan amount and cleared when the exit kicks in

  • Experience – products available for all experience including first time buyers and first time landlords 

  • Expats considered 

  • Security – no limit on security being used 

  • All types of security acceptable i.e. inhabitable, land, etc. 

  • 1st and 2nd / 3rd charge options available

Who uses bridging finance?

  • Developers

  • Auction purchases

  • Company owners – capital raise (business use)

  • Below market value purchases

  • BTL/Land/HMO purchases 

What’s the difference between a bridging loan and a term loan?

Other than the length of term, one of the main differences between a bridging loan and a term loan is how long it takes for the funding to be approved. 

Small red model houses

While a lender can take weeks to approve a term loan, you could receive an offer in principle on a bridging loan in less than two hours. Depending on surveyor access and legals, bridging loans can be completed within a 10 day period.

What can I use bridging finance for?

Lenders typically offer bridging loans for the purposes of residential or commercial property purchase or renovation. For instance, a business buying a new property and renovating it so it is fit for purchase, i.e. a shop fit. It can also be used to help you cover the cost of buying a new property while you sell an existing one.

Bridging finance is most commonly used by homeowners, landlords and property developers.

You may also be able to get bridging finance for other commercial activities, depending on the lender’s appetite. Keep in mind that you will need to have a clear exit plan in place. Lenders will need to know how you are going to pay off the loan in full plus interest if that’s your plan, or if you’ll move to a longer term finance option such as a mortgage. 

For example, a business might decide to pull out equity to carry out a large contract. The client can then clear the loan once the contract is finished and they have received payment.

Term requirements

Nearly all lenders will expect you to pay off the loan within a 24-month period. The lender will require evidence of how you plan to pay the loan back, such as through a property sale or by taking out a mortgage. It’s wise to have a plan B repayment strategy in place too. 

There are no exit fees on bridging loans which can make it an attractive option. 

Do bridging loans have high interest rates?

Nowadays, bridging loans are very competitive – rates start from 0.45%.

Bridging loans offer two payment methods: retained/rolled up payments and serviced payments. Additional costs to consider are the set up fees which can be around 2% of the loan amount. The Funding Options team can explain the terms and conditions of different bridging loans to you.

How much will I be able to borrow with a bridging loan?

Depending on the property’s value, you might be able to borrow between £35,000 and £250 million of bridging finance. In most cases, you’ll be able to borrow up to a loan-to-value (LTV) ratio of 75% of the value of the property. It also depends on whether you are taking out a first charge loan or a second charge loan.

You can find out more about using bridging finance for financing developments, refurbishing properties and buying properties at auction by visiting the Funding Options Knowledge Hub.

Get started

Vivek Seda

Vivek Seda

Asset Lending & Property Team Lead

Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.

Subscribe to our newsletter today

Sign up for the best of Funding Options sent straight to your inbox.