A Guide to Bridging Finance for Commercial Property

Bridging loans and using them to purchase new businesses and commercial property in the UK are highly confusing.

Bridging loans are a short-term loan solution that can be approved in just a matter of days, some of which can be completed in 72 hours.

The term ‘bridge’ is a finance bridge to bridge the gap between due debts and a line of credit not yet available to the borrower. This is mainly seen when purchasing a property if a mortgage is not approved immediately.

Consider bridging finance as a temporary or short-term loan to bridge the gap between buying and selling a residential or commercial property.

While it applies to social and residential properties, each type has distinct requirements.

What Can a Bridging Loan be Used for?

Property purchasers can use a bridging loan for most commercial uses, including purchasing or renovating land and commercial properties. The borrower must be able to provide the lender with all relevant details, including when the loan will realistically be able to be paid off and supply them with a clear ‘exit’.

An excellent example of when a business owner might need a bridging loan is at an auction. If a great opportunity arises and they need the funds in just a few days, a bridging loan can see them through until their mortgage gets approved. It would be a shame for someone to miss out on such a great deal due to the lack of finance.

Typically, the term is shorter for commercial property because the purchaser can sell their property quickly. However, if the commercial property is an office or retail, it may take longer to sell today.

More people work at home for part or all of the work week, so there is less demand for office space.  Additionally, online shopping is now preferred over in-person retail stores; therefore, retail properties are sometimes hard to sell unless they are in ideal locations.

For other bridging loan uses, read more here: What Can a Bridging Loan Be Used For?

What is an ‘Exit’?

Above, it was mentioned that those applying for bridging finance need an ‘exit’. Brokers and lenders use this term when they want to know how the loan will be cleared, approximately how long it will take, or when the finance will become more permanent, such as a mortgage.

There are two types of bridging loans: open and closed. The more common type of loan is completed – there is always a fixed exit date in place, so lenders are more likely to lend on these terms as they have the promise of the funds.  Open bridging finance is less common and usually comes with higher rates as there is less certainty.

What Do You Need to Get a Bridging Loan?

If you’re considering applying for a bridging loan, you will need to take a few things with you.

Business Plan

A detailed business plan is often a prerequisite for bridging loans. The plan will include the borrower’s history and experience, the property details, and the proposed use of the loan.

Personal Details

Your full name, current address, birth date, employment status and information on any other properties you own.

Property Details

You’ll need to supply details of the property you plan on purchasing. These details include the type of property, the property address, its value, and the tenure, whether freehold or leasehold.

Documentation

Usually, the lender will ask for proof of ID and address, an asset and liabilities statement, and an AIP for the follow-on mortgage if refinancing.

Loan Request Details

The lender will want details about how much you wish to borrow. Generally, lenders will go to a maximum LTV of 75% of the gross loan amount. This includes retained interest for the loan term and any arrangement or broker fees. They will also want to know how long you want the loan for and also the exit strategy from you, which has previously been mentioned.

However, every lender is different, and while the above are standard things that your broker may require to see, don’t be surprised if they ask for any more details or documentation. It is always best to check beforehand so the process isn’t delayed.

Final Words

Bridging finance is a valuable option for borrowers who require funds to complete a purchase before selling their current property.

Nevertheless, it is essential to understand the potential risks associated with this type of financing before applying for a loan. Seek professional advice from your accountant, lawyer and financial advisor.