Auction finance for property developers and businesses

20 Jun 2022

When you buy a property at auction, you’ll usually need to pay a 10% deposit that day and the rest – plus fees – within just 28 days. While some property developers and businesses use cash, others opt for auction finance, and here’s how it works.

Auction finance for property developers and businesses

Auction finance is a type of specialist property bridging loan that enables individuals and businesses to purchase residential or commercial properties at auction. 

Although interest rates are usually higher, auction finance is quicker to get than other types of finance, like mortgages. In other words, it gives you peace of mind that you'll be able to cover the total price of the property you successfully bid on. 

How does auction finance work?

The first thing to remember is that you'll usually need a deposit of 10% to 35% of the property you're buying at auction, which can rise to 50% for high-risk properties. In some cases, you might be able to use another asset as collateral. 

One of the benefits of auction finance is its speed. You'll typically receive the funds within 14 days. It's a short-term finance type with terms usually within one to 24 months, depending on the lender's needs and circumstances. 

What is an exit strategy?

The lender will want to see that you have a clear exit strategy. This is your plan for how you're going to repay the finance. For example, will you repay the loan through the money you make after refurbishing the property and selling it?

You can expect to pay a higher interest rate than you would do with a mortgage. 

Your interest rate will depend on the lender and the bought property. Property developers with proven track records are likelier to get a better deal. You might have to pay interest up front, monthly, or at the end when you repay the loan. 

Auction finance can be used to fund a range of different property types, including:

1. Residential property

Property developers might use auction finance to purchase a dilapidated property to refurbish it. Or a landlord might fund their purchase using auction finance before finding a buy-to-let mortgage. On the other hand, an individual may use it to buy somewhere to live before making it mortgageable. 

2. Commercial property

If you're a business owner, you might use auction finance to secure new premises, such as a shop, restaurant, office or industrial unit. Or, if you're a property investor, you might use it to purchase a commercial property to let it out to other businesses.

3. A mixed-use property

Property developers use auction finance for projects that combine residential with commercial, such as a pub with some apartments above it. In these cases, lenders tend to want to see a business plan. 

Auction finance can also be used to secure residential and commercial foreclosure properties. A foreclosure – or repossession – is when the person who owns or occupies a property can't pay the mortgage or the developer hasn't sold stock quickly enough.

4. Land

Auction finance can also fund land purchases before a longer-term funding solution is arranged, such as a self-build mortgage. 

Tips for getting auction finance

Are you thinking about applying for auction finance? Lenders consider applications individually, but there are a few things you can do to improve your chances of getting approved for funding. Here are a few quick tips to keep in mind:

  • Build a good credit history 

    – adverse credit history could work against you when applying for finance.

  • Have an exit strategy

     – the lender needs to know you have a realistic exit plan.

  • Increase your deposit

     – if you're in the position to be able to do so, you may want to offer a more significant guarantee as interest rates could be lower.

Auction finance is just one of many types of property finance on the market today. Development finance, for example, is another type of short-term finance designed to fund building and development costs. Then there are longer-term solutions like buy-to-let mortgages and commercial mortgages. 

Whether you're buying a mixed-use property at auction or need to secure a longer-term funding solution, use Funding Options to see what you could be eligible for today.

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Is my business eligible? 

If you have a business that can meet its financial obligations, yes. Whether you are a sole trader, a partnership, a limited company, or a start-up - there are many kinds of auction finance available with a lender to suit every business need. 

Discovering the best auction finance options with the most competitive rates and the ideal lender can be time-consuming and complicated. However, through our award-winning, innovative and data-driven platform, Funding Cloud™, we can offer speed and certainty for SMEs through a real-time, centralised and two-sided marketplace delivering instant decisions and firm offers from lenders. 

Register free today with Funding Cloud™ and connect your business to lenders and partners to facilitate fast, accurate, secure funding at scale. 

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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.

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