The bridging finance sector has grown dramatically over the last 5 years. In 2011, it was worth £750 million in but is now valued at around £4 billion in the UK.
Bridging is a type of finance used for businesses to ‘bridge the gap’ and pay for a large purchase where there is a strict time deadline. With loans available for up to £25 million and only lasting a maximum of two years, the idea is that the loan will either be repaid upon the sale of something or is used before more finance becomes available.
About the industry
There are around 40 major bridging lenders in the UK and thousands of brokers that have emerged in the last two years. There are only a few lenders that facilitate deals that run in the hundreds of millions of pounds.
The industry is divided between regulated and non-regulated lenders and whilst they all have to follow FCA guidelines, the non-regulated firms do not necessarily have to carry out credit checks and can charge higher interest rates. A main distinction is that they cannot lend to an individual if the property in question is their primary residence.
What is it?
Loans are most commonly secured on a property or a business asset and by having this security means that interest rates remain relatively low at around 0.59% to 2.0% per month. Additional fees can be charged by brokers for commission (up to 2.0%) and procurement fees (up to 2.5%)
Bridging loans are a type of secured loan, which means you will need to own property, land or another similar high value asset to use them.
They are often used by landlords and property developers to fund projects, but they are becoming more popular with homeowners moving home as well.
How bridging is used for property
For homeowners, bridging loans can be used if they are desperate to complete on a property but they still need the finance from their existing home which they have not sold yet. Using bridging finance, they are able to borrow and purchase the new property and repay the loan once their existing home has been sold.
It is a popular finance option for property developers who are competing for the purchase of a property and want to close the deal quickly. Funds are likely to be available within 2 to 4 weeks, which is significantly quicker than a mortgage application and all the property chains associated with a traditional mortgage.
Another common use of bridging finance is to pay for a property that was purchased at an auction. Once the gavel falls, bidders have 28 days to come up with the money to pay for their estate. Rather than wait for a mortgage agreement to go through, they can find faster finance through a bridging lender or broker.
How start ups can use bridging finance
Very fast growing start-ups can apply for a bridging loan in order to fulfil a certain order or help accelerate their growth. Whether the loan is secured on their office building or equity in their business, the money can be used to purchase equipment, hire new staff or invest in technology.
Again, the idea is that the loan will repaid upon hitting a certain target or exit; so if the start-up makes a huge return in the next year or sells their business, they are able to repay their loan effectively.
Bridging loans: pros and cons
What can you use a bridging loan for?
How do they work?
What are charges?
When you apply for a bridging loan a charge is added to the property you are using as security by the lender.
Charges determine the priority of debts if you are unable to repay your loan:
Second charge lenders usually need the permission of the first charge lender before they are added. There is no limit to the number of charges that can be listed on a property.
How much can you borrow?
The amount you can borrow depends on the value of the property or land you are using for security. Lenders currently offer loans from just £5,000 up to over £250 million.
Bridging lenders will quote a maximum loan to value (LTV), usually between 65-80%.
How much do they cost?
Bridging loans can be very expensive because they charge both interest and a range of fees.
InterestBridging lenders charge interest on your loan, but because they usually only last a few weeks or months they charge monthly interest, rather than quoting an annual percentage rate (APR).
Interest is normally charged in one of three ways:
FeesOn top of the interest you will have to pay a set of different fees when you take out a bridging loan, including some or all of the following:
Where can you get one?
Bridging loans are offered by companies ranging from major international banks to small specialist lenders.
To make things easier you could use a broker to help you find the right bridging loan for your circumstances, but they may charge a fee.
How long does it take?
You will find out if your loan has been approved quite quickly, often within 24 hours.
Once approved, you usually have to wait around two weeks for:
Paying back your loan
Bridging loans are repaid in a single instalment when your funds are available - if you have chosen to defer your interest charges these will also be due at the end of the term.
Closed bridging loans will have a set repayment date in place when you apply. If you choose an open bridging loan you need to arrange the repayment when your funds are ready.
What are your other options?
Bridging loans are a specialised type of lending but some possible alternatives include;
Years in business | 10 years
Management experience | 50 years
Virgin Sunday Times Fasttrack 100 listing | 3 times consecutively
Non Executive Director of the Year (Private Company) | 2009
Can we help?
If you have any questions or feel we can help with your business finance requirements, we’d love to hear from you.
firstname.lastname@example.org | 0844 800 9931
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