Expert Guide To Using Bridging Loans To Purchase Commercial Property From ABC Finance

Understanding Commercial Bridging Loans

Bridging loans are short-term loans that are secured against property and are designed to cover a short-term funding gap. Bridging loans can be used by business owners for numerous reasons, but the most common are:-

• To fund property purchases at auction.
• To release funds to pay an urgent bill.
• To purchase property that requires significant refurbishment or conversion.
• To complete on a property transaction quicker than would be possible using a commercial mortgage.

Naturally, there are many other reasons for taking a bridging loan and most revolve around needing to raise finance quickly.

A bridging loan can be used for almost any purpose and against almost any property, and even land. Commercial bridging loans are used specifically to raise finance against commercial properties such as offices, warehouses or shops.

Bridging loans are usually arranged for between 1-18 months, with the loan being repaid in full at the end of the term. Loans are usually repaid by refinancing to a commercial mortgage or by selling the property.

During the term of the loan, the interest is often ‘rolled into the loan’. This means that no monthly repayments are required, instead, the interest is simply added to the loan balance each month. At the end of the term, the original loan, plus any fees and interest are then repaid together in full.

Using Bridging Loans To Purchase Commercial Property

Commercial bridging loans can be used by business owners to purchase new trading premises quickly. This can lead to major savings as mortgages for commercial properties tend to take far longer to complete than standard residential properties.

As the market tends to move slower, there is potential to negotiate a much lower price with the promise of the transaction completing quickly.

Bridging loans are usually completed in 5-14 days, due to a streamlined application process. Commercial mortgages take far longer, with completion usually taking place in 6-8 weeks.

Typical Bridging Loan Rates & Charges

Bridging loan rates for commercial properties tend to be slightly higher than those secured against residential property. That being said, rates are dropping across the industry and as such, are much lower than they were a few years ago.

Commercial bridging finance rates currently start at 0.65% per month, with rates increasing as the loan to value increases.

The highest loan to value that is currently on offer is 75%, with rates starting from 0.84% at 75% LTV.

Although there are some strong rates in the market, rates of around 1% per month are common, with the rate increasing in line with the risk presented.

On top of the interest charged, the lender will usually charge an arrangement fee of 2%. This is sometimes reduced based on the level of risk and the size of the loan. Larger loans, usually above £500,000 may see the fee charged reduce to as little as 1% if the application is strong.

When using a broker, fees are often charged on completion, with some even charging fees on application. Broker completion fees are often 1%, with some even charging 1.5-2%. It’s worth noting that not all brokers charge a fee, so finding a fee-free broker can represent a considerable saving.

Both broker and lender arrangement fees are often added to the loan and repaid on completion, as with rolled up interest.

The Pros and Cons of Commercial Bridging Loans

Bridging loans have helped countless business owners to hit their goals, whether that is completing a property transaction quickly, or raising capital for the business. Although they are a strong tool, they can be riskier than other types of borrowing when not utilised correctly.

As such, it’s important to consider the facts carefully before committing to a bridging finance application.

Pros

• As mentioned throughout the article, bridging loans can complete very quickly, meaning you are able to complete on property transactions that may otherwise be impossible.
• Lenders will allow you to undertake heavy refurbishment or conversion of a property – something that would not be allowed by most mortgage lenders.
• There are often no monthly payments to make, which can be ideal if cash flow is an issue short-term.
• Some lenders will allow you to base the loan to value on the open market value, rather than the purchase price. This means that certain below value purchases may be possible with little to no deposit.
• The rates charged are getting lower. Previously the cost of flexibility had to be weighed up against very high charges. With loans getting cheaper, this is less of an issue than ever.

Cons

• Bridging loans add cost to a property transaction. Even if the rates and charges are relatively low in the market, they still add up. Where possible, if it is possible to stick to traditional borrowing sources, such as commercial mortgages, it will usually be sensible to do so.
• The terms offered tend to be very short, meaning there is often not a great deal of time to arrange repayment of the loan. You must always be prepared before taking out a bridging loan as if you struggle to make your chosen repayment method work, you can fall into default. In this scenario, the risks and costs can quickly spiral. As such, it is crucial that the exit is given serious consideration before a bridging loan is taken out.