Commercial bridging loans are bridging finance secured against commercial property. You can use them to secure funds when you are in a hurry to purchase or release funds from a property.
They are convenient in some instances when you can’t wait for the lengthy process of applying for a standard mortgage via a bank.
For example, when purchasing a commercial property under auction conditions that must close in 28 days. You can use a commercial bridging loan to fund the purchase on time to protect any deposits.
When should you use a commercial bridging loan?
Sometimes, getting a traditional mortgage to buy commercial property can be a slow and challenging process. Especially if the property in question is in poor condition or the land doesn’t have planning permission.
This is when a commercial bridging loan is a suitable alternative. It provides the necessary capital to refurbish or develop the property, at which point you can sell or refinance it and pay the money back.
Bridging loans are also helpful when you need money quickly. They are faster to arrange than mortgages and used to buy a property at auction when the purchase has to happen within 28 days. You can also use them if the sale of an existing property falls through and you cannot go through with another purchase.
You can use these types of loans to raise money for other purposes, such as buying a new business, paying off a debt or improving cash flow. But you will have to secure it on a commercial property or a semi-commercial property such as a shop with flats above it.
How do commercial bridging loans work?
Any individual, sole trader or company can apply to take out a bridging loan on any property. The term of commercial bridging loans is significantly shorter than standard mortgages. It can be for as little as 1 month or extended to 2 or 3 years. The majority of commercial bridging loans are taken out for 12-18 months.
You need to be able to prove you are financially able to repay the loan to be approved. You could present a plan for the resale of the property you are buying or demonstrate how refurbishments can increase its market value once it’s in a mortgageable condition.
How much can you borrow?
Commercial bridging loans usually cover up to 75% of the property’s value. Different providers have varying minimum amounts for commercial bridging loans and a flexible maximum, which means you may fund practically any loan.
It is essential to consider the interest when borrowing. It is usually deducted upfront, which means you will receive less funds upfront than you would if paying monthly.
What can you use a commercial bridging loan for?
There are several reasons to take out a commercial bridging loan. Their original purpose is to finance property transactions, but their utility extends beyond that.
You can use a commercial bridging loan on any type of real estate – such as a shop, an office, a warehouse or land. The property you plan to buy may be in poor condition. You can then use the commercial bridging loan to refurbish the property or develop the land and re-sell it.
Additionally, people use commercial bridging loans to buy a new business, pay off a debt or improve cash flow. It needs to be secured on a commercial property or a semi-commercial property such as a shop with flats above it.
What is the lending criteria?
Most lenders require income proof and the commercial bridging loan typically comprises all fees and monthly interest payments you owe. Thus, you are not required to make any monthly payments to make. This aspect normally removes the need to prove the loan is affordable by income.
You can choose not to make monthly repayments if you don’t want your financial situation and credit history to be considered when applying for a commercial bridging loan. The lender will then assess your exit strategy to make sure it’s viable. If you have presented your case to a satisfactory standard, you’ll be able to get a loan provided that you intend to refinance it.
The good news is that a poor credit history won’t affect your chances of getting a commercial bridging loan. However, it can affect your ability to get a mortgage on the property later, which could make it more challenging to get a loan.
Because commercial bridging loans are riskier for the lender, fewer lenders offer them, and they are more expensive than residential loans.
If you are considering taking out a commercial bridging loan, It’s best to speak with a broker who specializes in bridging loans. They will be able to look at the available offers on the market and find a deal that best suits your needs. They will also help you through the application process and devise a solid exit strategy.
Brokers usually charge a fee of 1% or more of the total loan amount. However, you typically make up for this fee through the deals they are able to find through their network of lenders.
As with every other financial product, it is vital to study the market and compare deals. Make sure you calculate the total cost of the loan over the term, including the fees you’ll have to pay and not just the interest rate. Some lenders charge penalties charge if your exit strategy fails. Others are more likely to reduce the amount of interest if you repay the loan early.
There are benefits to taking out a commercial bridging loan. If you need to borrow money quickly to buy a property or raise funds for another purpose, this offers a valuable option if you can’t access cheaper types of finance.