When considering a bridging loan, various factors come into play, such as whether a regulated or unregulated loan is needed, the purpose of the loan, the loan term, the required security, and the maximum borrowing amount. These are just a few of the common questions about bridging finance.
We have crafted this comprehensive guide to help you navigate the overwhelming amount of information on bridging finance. By the end, you will clearly understand this type of loan and be equipped to make an informed decision about its suitability for your needs.
What Is A Bridging Loan?
As the name implies, a Bridging loan is a form of short-term financing utilized by business owners to bridge the gap in their cash flow. They range from a few weeks to around a year and are designed to provide funding during reduced revenue or when a significant investment has depleted the business' working capital.
As the name implies, a Bridging loan is a form of short-term financing utilized by business owners to bridge the gap in their cash flow. They range from a few weeks to around a year and are designed to provide funding during reduced revenue or when a significant investment has depleted the business' working capital.
How Much Can You Borrow With Bridging Finance?
The amount borrowed through a bridging loan largely depends on the property or asset being used as collateral. Typically, the loan can range from 65% to 80% of the total value of the asset. After a surveyor evaluates the property or asset, lenders will provide a quote based on the Loan-to-Value (LTV) ratio.
However, if a borrower is deemed high-risk, the LTV ratio may decrease to 50%. On the other hand, it is possible to obtain a loan for up to 100% LTV, but this would necessitate the use of multiple properties as collateral, which can lead to added costs in terms of additional valuation fees. Moreover, failure to repay the loan may result in repossession of the properties or assets, which can incur significant costs.
Interest Rate On Bridging Loan
Lenders will charge interest on the loan amount, which tends to be higher than other forms of financing, such as a small business loan. The ways to pay this interest are discussed later in this guide under the bridging loan interest rates section. At the end of the loan term, the borrower must repay the original loan amount plus all interest charges. It is known as an "exit route". Some common methods of repaying a bridging loan include: refinancing, selling property or assets, receiving an inheritance, collecting money owed, or a policy reaching maturity.
Regulated And Unregulated Bridging Loans
The term "unregulated bridging loan" may sound suspicious, but it simply refers to the classification of the loan as being for either residential or commercial use. On the other hand, a "regulated bridging loan" is for personal residential properties only, such as those used for living or intended for residency. These loans are monitored by the Financial Conduct Authority (FCA), providing extra protection for the borrower in case of mis-spelling or bad advice related to the loan.
An unregulated bridging loan is intended for business or property investment purposes. Its unregulated status is necessary due to the complex nature of these loans, which requires greater flexibility in terms of customization to meet specific needs and circumstances. This type of loan allows for a more tailored approach.
Is Bridging Finance For Residential Or Commercial Property?
A bridging loan is typically considered commercial when 40% or more of the property is used for commercial purposes. When using a bridging loan for a property transaction, the borrower must specify if it is for a residential or commercial project. For instance, if a person wants to purchase a shop with apartments above, both included in the sale, the commercial bridging loan would require the retail space on the ground floor to occupy 40% or more of the property's total floor area.
Can You Get A Bridging Loan?
Lenders will ask you to meet certain criteria to qualify for a bridging loan. But as the loan is secured against an asset, the criteria can sometimes be less stringent than other finance forms.
To be eligible for a bridging loan, lenders have certain criteria that must be met. However, since an asset backs the loan, the requirements can sometimes be less stringent than other finance types. Some common requirements are as follows:
- A new mortgage with the same lender
- Possession of property, land, or any other valuable asset to serve as collateral
- A business plan if the loan is for commercial purpose
- Provision of information regarding the purpose of the loan and a plan for repayment (exit route
If you meet these requirements, there are three main options for obtaining a bridging loan: major banks, mortgage brokers, and specialist lenders.
Benefits Of Bridging Loans
Some advantages of bridging loans include the following:
- Rapid decision making, with a response to your application given within 24 hours and funds transferred within two weeks after necessary checks.
- The possibility of borrowing large amounts, potentially up to £250 million, with appropriate security.
- The option to defer monthly repayments makes bridging loans a useful solution when cash flow is limited.
- The ability to finance the purchase of properties that traditional mortgage lenders may not fund.
Drawbacks Of Bridging loans
Consider the following drawbacks in addition to the benefits:
- Your property securing the loan means that defaulting on repayments could result in the loss of the property.
- Quick payment and flexibility come with high-interest rates.
- Additionally, high-interest rates are not the only cost, as additional fees are typically charged.
Conclusion
Bridging loans are short-term financing used to bridge a business's cash flow gap. The amount borrowed largely depends on the asset's value as collateral, typically ranging from 65% to 80% of the total value. The interest rate on bridging finance on land is generally higher than other forms of financing.
Bridging loans can be either regulated or unregulated, with regulated loans monitored by the Financial Conduct Authority and used for personal residential properties. In contrast, unregulated loans are intended for business or property investment purposes and offer more customization.
