Commercial Bridging Loans
When it comes to bridging finance, there are two main categories - personal or residential bridging loans, primarily for private house purchases, and commercial bridging loans. Within the commercial bridging loans sector there are all kinds of options and scenarios where short-term finance might be appropriate, and so it’s important to have a good understanding of when and where you might want to use it.
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What's in this article?
In this guide to commercial bridging loans we’ll look in detail at some situations where bridging finance can be useful, how to apply, how to get the best deals and what you can expect in terms of interest rates and terms. By the end of the article you should feel a lot more confident about commercial bridging finance and what your next steps as a business might be.
What is a commercial bridging loan?
Let’s start with the basics. A bridging loan is a form of short-term finance, designed to bridge a financial gap between two points. For example, you might need a commercial bridging loan to fund the purchase of new offices before you sell the existing ones, in order to ensure a smooth transition with as little as possible down time.
Bridging finance is quicker and easier to arrange than a commercial mortgage, but it’s worth keeping in mind that it is also more expensive. For most businesses though, this is a worthwhile short-term cost to bear in order to facilitate a project.
How much can you borrow?
This will depend on several factors, but for commercial purposes you can often borrow anything from smaller amounts like £100,000 up to millions.
The principal determining factor is your loan to value ratio - the amount you’re looking to borrow as a percentage of the property value. Most lenders will lend up to a maximum in the range of 70-75% LTV.
If you need to borrow a higher LTV then it may be possible to secure a larger loan if you have additional assets you can use as security.
Lenders will of course look at a range of factors before agreeing your loan, including your business setup and turnover, financial projections and your exit strategy. This is how you show you have a secure plan in place to pay the loan back at the end of the term.
When can I use a bridging loan for commercial purposes?
There are lots of different scenarios where you might want to get a commercial bridging loan, and they can be used for a whole range of purchases, including, but not limited to:
- Purchasing new office buildings
- Purchasing manufacturing space
- Investing in warehouse space
- Refurbishing an office premises
- Investing in a new business venture such as a hotel or care home
- Buying a property at auction
- Purchasing a shop or other retail premises
- Freeing up capital for another venture
Let’s take a look in detail at just one of these as an example of how commercial bridging finance works. By taking a step by step look at how a bridging loan could be used we should end up with a much clearer picture of how they work. Bear in mind that this example is for illustrative purposes only - it’s not based on an actual business, it’s just designed to show the theory.
Commercial bridging loans - a case study
Let’s say you’re a small manufacturing company, making pet food - high end frozen meals for dogs.
Business is going well, you own a small industrial premises where you make your dog food in small batches, but you’re limited in terms of how much you can produce by the size of your team and the equipment you have.
A large supermarket expresses an interest in placing a regular order with you. It would mean a big boost in sales and a huge amount of publicity, but with the current set up you wouldn’t be able to fulfil the order. If you were able to buy a large piece of equipment for your manufacturing plant you’d be able to cut out a large amount of the time and manpower you currently need, and could scale up production to meet the order.
The piece of equipment however costs £50,000. The building you own outright is worth £200,000. You could potentially remortgage to release equity to cover the purchase, but that would take some time to organise and the supermarket wants a decision quickly, otherwise they are going to offer the contract to a rival pet food maker. Instead you decide to apply for a bridging loan to fund the purchase.
The bridging loan is secured against your existing property, and because you have plenty of equity you don’t have to worry about your loan to value ratio. The bridging loan has a quicker turnaround time than a mortgage, so you’re able to get set up quickly, and you know you’ll make the money back quickly at your new operating capacity. With the supermarket contract in place you have a secure exit strategy and will be able to repay the bridging loan in full within 12 months.
The benefits of commercial bridging finance
Hopefully this fictional case study has given you a little bit more of an insight into where bridging finance can be useful for business, as well as highlighting some of its main benefits over other forms of finance.
To recap, the key benefits to commercial bridging finance are:
- It’s quicker to arrange than a traditional commercial mortgage. Many applications can be agreed in days or even hours in special cases.
- It’s flexible, giving you the option to make quick investment decisions and respond to rapid changes.
- Higher limits than unsecured borrowing options, especially if you have additional assets you can secure your borrowing against.
How do I repay a commercial bridging loan?
Commercial bridging finance uses an interest-only model.
This means that you don’t repay any of the capital until the end of the term, you just pay interest. This can be done in a few different ways.
Serviced interest
Serviced interest means that you pay off the interest on the loan every month and a fixed amount. At the end of the term you simply pay off the capital amount of the loan. This is the cheapest way to manage bridging loan interest but you will need to be able to prove to the lender that you have the capacity to make the repayments.
Some businesses prefer to prioritise cash flow, or simply can’t afford to make regular payments, and so make no interest repayments at all. There are two ways to do this - rolled up interest and retained interest.
Rolled up interest
With rolled up interest the interest you’re charged each month gets added to your capital loan amount, and then every proceeding month you accrue interest not just on the capital but also on the interest added to the account to date. This compound interest effect means that overall you’ll pay more than if you make monthly interest payments.
Retained interest
Retained interest is sometimes seen as a middle ground between the two options - it can be slightly cheaper overall than rolled up interest but still without the commitment to regular monthly payments. In this model you pay interest upfront from the capital of the loan and then if you settle early, some interest is refunded.
Although they may seem like small differences, they can have a big impact on the overall cost of borrowing so it's important to take professional advice to make sure you choose the repayment model that works best for you.
What is a semi-commercial bridging loan?
If we know that a commercial bridging loan is to purchase commercial property such as offices, pubs, care home and factories and a residential bridging loan is for properties that are going to be lived in or rented out as regular homes, what exactly would you use a semi-commercial bridging loan for?
A semi-commercial bridging loan would cover a property that had a mix of the two elements - something that was a business premises, earning money for a company, and something that was lived in or rented out to private residential tenants.
Can you think of an example of what this might look like in practice?
Alternatives to commercial bridging finance
If you’re looking to borrow money for your business, it’s important that you explore all of your options to make sure that a commercial bridging loan is for you.
Taking expert financial advice is an important part of this of course, but to get you started we’ve picked out a few common alternatives that might be worth exploring depending on what you need the loan for, how quickly you need it and how much you can afford to pay.
Commercial mortgage
If you’re looking for an affordable way to borrow over a longer period then a commercial mortgage could be an alternative to a bridging loan. The main benefit of a traditional mortgage is that it’s normally cheaper than bridging finance, making it a more sensible option if you need to borrow for longer and the interest is going to start stacking up. Most bridging loans aren’t available for longer than around three years anyway, so if you won’t be able to pay back the loan comfortably within this sort of timeframe then a mortgage could be worth exploring instead.
To be eligible for a commercial mortgage to buy a new premises you’ll need to have a good deposit and a solid business plan showing how you’re going to be generating an income to cover your mortgage repayments. If you want to remortgage an existing property to release equity then you’ll need to have a good amount of equity to be able to secure the mortgage against. Take advice from a commercial mortgage broker if this is an avenue you want to go down.
Business loans
While mortgages can take a while to arrange and get approved, business loans offer the speed of a bridging loan, but sometimes with a little more flexibility around terms. Business loans fall into two categories - unsecured loans, which aren’t secured against assets - and secured loans, which are normally secured against a building, equipment or other tangible asset. Another common form of business loan is called invoice financing, which is a loan secured against your accounts receivable.
Other ways to raise business capital
If traditional borrowing isn’t something that interests you, or perhaps isn’t something your business is eligible for, there are plenty of other ways to raise money for you business, so it’s worth sitting down with your teammates and thinking outside the box.
You could think for example about:
- Subletting premises you’re not using to maximum capacity, either on a large scale or just offering a coworking space
- Crowdfunding - great if you have a specific and eye-catching project you want to finance
- Peer-to-peer lending
- Investment from venture capitalists
- Using your own money - if you have the capacity, this is the ultimate in flexible borrowing! Just remember that your own money will be at risk.
Conclusion
We’ve looked at how commercial bridging loans can be used, an example case study, rates and terms and alternatives to consider, so hopefully by now you’re feeling fairly confident about whether commercial bridging finance is something you want to explore for your business.
The next step is to get some professional financial advice to help you work out what you need to borrow, what you’re eligible to borrow, and how to get the best deals. Get in touch today and let us help you get your business growing.
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