How can a commercial bridging loan help you raise funds and in what situations are they useful? We look at how they work and their benefits and downsides.
If you need funding to buy a business property but can’t get a commercial mortgage, you’ll need a commercial bridging loan. This is short-term finance secured on commercial property that is designed to “bridge” a funding gap before you can put longer-term finance in place or pay it back in another way.
When would you use a commercial bridging loan?
It can sometimes be difficult to get a mortgage to buy commercial property such as a shop, an office, a warehouse or land if the property is in poor condition or the land doesn’t have planning permission.
In these cases, you could buy the property with a commercial bridging loan, and then once the property has been refurbished or planning permission has been granted, you could sell the property or refinance it and pay the money back.
Bridging loans can also be useful when you need to borrow money fast since they can be arranged a lot quicker than mortgages. For example, they can be used to buy a property at auction when you have to complete the purchase within 28 days, or they can be used if the sale of an existing property falls through that stops you from being able to go ahead with a planned purchase.
You don’t have to be buying property to take out a commercial bridging loan. You can use them to raise money for other purposes, such as buying a new business, paying off a debt or improving cash flow. It just needs to be secured on a commercial property or a semi-commercial property such as a shop with flats above it.
How do commercial bridging loans work?
You can take out a commercial bridging loan regardless of whether you’re an individual, sole trader or company, and you can take them out on all types of property. It’s usually possible to borrow up to 75% of the property’s value (known as loan-to-value or LTV) with minimum loan amounts starting at around £25,000.
The term of the loan can be for as little as 1 month or for as much as 2 or 3 years but most are taken out for 12-18 months. Since a bridging loan is a more expensive way to borrow than a mortgage, you should take it out for as short a period as possible.
To show that you’ll be able to pay back the loan within the relatively short time frame, you’ll need to have an exit strategy (how you plan to repay the loan) in place. You could plan to sell the property when it’s refurbished and use some of the money to repay the loan, or you could raise the money by refinancing the property with a commercial mortgage once it’s in a mortgageable condition.
Loans are taken out on an interest-only basis and have monthly interest rates. You’ll pay lower rates for smaller LTVs, although the lender will price each loan according to the overall risk involved, which will depend on a range of factors. Rather than making monthly interest payments, you can choose to “roll up” the interest over the term of the loan and pay it all off at the end along with the capital or have the total interest amount deducted from the loan at the outset (known as “retained” interest).
You may have to pay an arrangement fee of 1-2% of the loan as well as valuation and legal fees and sometimes an exit fee. There may be hefty penalties if you don’t pay it back on time.
Lending criteria
If you choose not to make monthly repayments, your financial situation and credit history are less important than when you’re applying for a mortgage. Instead, the lender will focus on your exit strategy to make sure it’s viable. It will want to be satisfied that you will be able to sell the property within the necessary time frame if that is your plan or that you’ll be able to get a mortgage if you intend to refinance it.
A poor credit history won’t necessarily hurt your chances of getting a bridging loan, but it could affect your ability to get a mortgage on the property later, which could make it trickier to get a loan.
How to get a commercial bridging loan
As commercial bridging loans are riskier for the lender than residential ones and are more specialist products, fewer lenders offer them and they are more expensive than residential loans.
It’s best to speak to a broker specialising in bridging loans to find the best deal for you. They will be able to look at the whole available market and have access to deals only available through brokers. They will also help you through the application process and make sure your exit strategy is solid.
You may have to pay a fee to the broker of 1% or more of the loan amount, but as they will usually save you money by finding you the cheapest suitable deal, it’s still worth using one. Check how they charge for their services beforehand though.
Make sure you compare deals by looking at the total cost of the loan over the term, including the fees you’ll have to pay rather than just the interest rate, which a broker can do for you. Also look at what penalties lenders charge if your exit strategy fails, whether the amount of interest will be reduced if you repay the loan early and how quickly they can grant you a loan if time is a factor.
Pros and cons of commercial bridging loans
While they let you borrow money quickly to buy a property you might not be able to get a commercial mortgage on or help you raise funds for another purpose using commercial property as security, they are an expensive way to borrow and can have high penalties for late repayment.
Bottom line
Commercial bridging loans are a useful option if you can’t access cheaper types of finance, but they should only be taken out if you have no alternative and for as short a term as possible to keep costs down.
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Cathy is a freelance journalist specialising in money, property, smart homes and technology. She worked at Which? for 12 years, first as a money writer then as an editor, before going freelance in 2018.
She's written for publications including The Money Edit, Ideal Home, Loveproperty.com, The i newspaper, the London Evening Standard. Cathy is also a Homes Under the Hammer superfan. See full bio
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