What Is Commercial Bridging Finance?
Commercial bridging finance is used when there is a gap in financing that needs filling quickly and easily. Commercial bridging loans are a type of short-term finance that is usually less than 12 months. These types of loans can be used by individuals or businesses. The purpose of this type of loan is to ‘bridge’ the gap between the payment falling due and either the main source of finance being available, or funds being received from another source such as the sale of a property. A commercial bridging loan is solely used for business purposes rather than residential properties. Our main areas of expertise within bridging loans is within European commercial bridging finance and International bridging finance We look after many companies and commercial entities in United Kingdom, Ireland, Scotland, Wales, Spain, Netherlands, France, Germany, Australia, New Zealand, United States, Austria, Belgium, Switzerland, Scandinavia and many more countries.
They can also be referred to as “caveat loans” or “swing loans”, however, in the UK they are usually just referred to as a bridging loan.
Bridging loans are often used by borrowers as a supporting form of finance that precedes a longer-term form of funding. In some cases, they are incorrectly seen by borrowers as an alternative to mainstream lending.
If you are considering commercial bridging, you should consider the exit strategy before committing to any terms. An ideal exit strategy from a bridging loan could be a longer-term form of finance such as a commercial mortgage, or a buy-to-let mortgage, and of course there is the option using commercial bridging lenders finance to buy time for simply selling the property.
- An individual
- A group (entity)
- An existing business looking to expand
You are eligible for commercial bridging finance.
For a Commercial Bridging Loan the overall use of the property has to be more than 40% commercial. For example, if you were buying a retail unit with a at above it, the retail unit’s value would have to be more than 40% of the total value. For landlords, or a landlord company, the exit strategy would usually be to refinance the loan onto a Buy-to-Let Mortgage, usually after doing some renovations to make the property suitable for rental. For commercial units that are bought using a Commercial Bridging Loan, the exit strategy usually involves refurbishing the unit then selling it or refinancing onto a conventional Commercial Mortgage.
Bridging loans secured on commercial property are more specialist than those secured on residential property, meaning there are far fewer lenders in this market.
Commercial properties pose a greater risk to lenders when compared to residential properties, therefore loans secured against commercial properties tend to be more expensive than if they were secured against residential property.
This is further reflected in the type of commercial property being used as security, and the interest rates reflect the different levels of risk.
What can Commercial Bridging Finance be used for?
Loans are secured on commercial or semi-commercial property. Semi-Commercial is commercial property that also has residential accommodation as part of the commercial premises. This could be owner occupied or rented out. You can use a commercial bridging loan for property development and for the below asset classes:
- Residential/Commercial/Mixed Use
- Office Buildings/Office Towers
- Retail/Retail Parks
- PRS / Build to Rent
- Development Exit Bridge
- Industrial units
- Care homes
- B & Bs
- Leisure facilities
- Shopping centres
They can also be secured on land:
- Development land with planning permission
- Land without planning
Loans can be used for most purposes, including:
- Buying property
- Pay debts
- Renovation, expansion, restoration of property
What are the Key Features of Commercial Bridging Finance?
There are many advantages of commercial bridging loan for property development when compared to other types of finance. When finance is only required for a short period of time, they often provide the cheapest option for raising the required funds. In addition they are fast to arrange, have flexible lending criteria so that approvals can be given quickly without extensive checks, and they can be secured on all types of property, including property that is unsuitable to other lenders. Commercial Bridging Loans can commonly be used for the below also:
- Commercial Refurbishment Finance – Renovating, converting or restoring properties
- Commercial Re-Bridging
- Buying a commercial property at auction
- For quick commercial purchases when a bargain property or other must have item comes along
- Solve commercial business short term cash flow problems
- Inheritance tax and probate issues from arisen from commercial ownership
- Buying commercial property below market value
- Repossession prevention of commercial property
- Commercial property development
What are the Criteria for Commercial Bridging Finance?
- Loan sizes: £50,000 up to £500m
- Term: 24 Hours up to a maximum of 36 months but generally over 12 months
- Security: A First legal charge will be required against the property
- Property types: All types considered
- Locations: United Kingdom, Ireland, Scotland, Wales, Spain, Netherlands, France, Germany, Australia, New Zealand, United States, Austria, Belgium, Switzerland, Scandinavia and many more countries.
- Types of Borrowers: Private borrowers, Limited companies, Partnerships, Offshore companies, SPV’s
- Age of Applicant: Minimum of 18 years old
- Acceptable Credit History: CCJs, Defaults, Arrears, IVAs, Bankruptcy, Repossessions, Statutory Demands, Winding up orders
Commercial Bridging Finance Exit Routes
- Property or asset sales
- Receipt of money owed
- Policy reaching maturity
What information would I need to provide?
- Applicant company name & number.
- Directors & significant shareholders CV’s or Biographies.
- Full site/ property address.
- Copy of the planning consent. If any
- Financial Appraisal (can exclude finance costs) and Cash-Flow.
- Detailed build or refurbishment costs.
- Schedule of proposed Accommodation.
- Details of the professional team (contractor, architect, structural engineer, CDM coordinator etc).
- Procurement Method (For example, Design & Build or Construction Management?).
- Any comparable sales information (or agent’s opinions) to support the proposed GDV.
Interest Repayment Options
Retained interest is where the lender ‘retains’ the interest for the full term of the loan. So, if you had a 12 month bridging loan you would not repay the interest to the lender until month 12. This can mean that as the interest rate is paid in one lump sum at the end of the term that the amount of interest repaid could be more than rolled-up or even monthly. However, this option appeals to many property developers due to the fact that it affords them time to do any internal improvements such as development work throughout the term without including ongoing costs throughout the term length.
With rolled-up interest the interest is added each month and increases in value in a sliding scale due to it being applied to the renewed sum of the loan increments plus the previous months’ interest, as the loan progresses. This option may be preferred to some borrowers as it can often be less costly overall when compared with retained, however, may be more expensive than monthly.
Retained and Rolled-Up
As you may have guessed, this option is the combination of both retained and rolled-up interest within one loan. What this means is that for an agreed amount of months within the term the interest will be repaid as retained and for the months that are left the interest would be rolled-up. For example, on a 12 month bridging loan agreement the interest repayments could be 6 months retained and 6 months rolled-up.
As it suggests, the interest repayments are set and repaid monthly. This can mean lower amounts of interest as the borrower is repaying the amounts each month. However, for those property developers that wish to do some work on increasing the value of the property over the term of the loan, this option may not be as desirable. Where the intention is to achieve a higher gross development value than the purchase price through development on the property, retained interest,or retained and rolled-up, may be preferred in some cases as the interest is deferred.
The Fees Explained
This fee can also be found in the terms provided by the lender. Often based on either the net or gross loan amount, arrangement fees can also be referred to as a facility fee. The purpose of these fees is so that the lender can acquire some profit from the arrangement of the loan for the borrower and can help to ensure that interest rates stay a little lower. A typical value would be around 2% for an arrangement fee, however, they can be lower and higher than that figure.
Valuation fees often vary depending on the value of the property that is used as security. These fees are an important part of the process from the lenders’ perspective. Valuations provide the necessary clarity on whether lenders can fund the borrower, based on the security that the loan is to be set against. The fees can also vary depending on the type of reports generated from the surveys and also the location of the property/security.
There is usually a small administration fee after the loan is accepted when the borrower executes any draw-down from the bridging loan’s credit line.
Once the loan term has arrived and the it is due to be repaid the lender will charge a redemption fee. The reason for this fee is for the removal of the charge over the security.
Lenders use solicitors to handle the loan agreements and securing the charge over the security (often a property). Costs are usually charged to the borrower and the value of the fee will be included within the terms provided by the lender for transparency.
Brokers charge broker fees and this can be seen in the indicative terms that they send across.
Indicative Terms Summary
The ‘decision in principle’ or indicative terms provided by the lender will usually include some or all of the following when applying for a bridging loan:
- Borrowers’ name
- Borrowers’ address
- Security address
- Gross loan amount
- Net loan proceeds to borrower
- Purchase price/valuation
- Purpose of loan
- Legal charge type (first or second)
- Interest rate
- Term length
- Interest payment basis
- Early repayment information
- Early repayment charge
- Total legal/solicitor fees
- Solicitor’s exit costs
- Surveyor fee
- Arrangement/facility fee
- Broker fee (where applicable)
- Administration fee (where applicable)
- Exit fee (where applicable)
- Key assumptions of the lender
- Borrower declaration which needs to be signed by the borrower/s
These are short-term loans by definition. As such, they are usually offered for periods between a few weeks and up to 12 months. There are options for longer terms as well, depending on the exit strategy and the lenders’ criteria.
For those situations where a definitive end date is set, a closed bridging loan may be more appropriate. If you do not have an end date in mind, an open bridging loan may a better option, however, may cost more; so keep this in mind when making your decision.
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