A guide to bridging loans for businesses

Commercial bridging loans are short-term loans commonly used to buy property. With bridging finance, you can access cash more quickly than with a regular business loan, but you’ll need to borrow against an asset, which also tends to be something like a property.

You’re more likely to be approved for bridging finance if you have a clear business plan in place, which shows lenders how you’ll fund your project after the loan, otherwise known as an “exit”. While bridging loans are popular with property buyers and investors, who need to unlock capital quickly, you can use them for other activities too, such as investing in a big stock purchase.

Bridging loans aren’t that different from actual bridges, in that they help your business get from one place to another. You might do things differently for a short period, while you get over an obstacle or reach where you’re trying to get to, but the idea is that you’ll eventually return to something more consistent, whether that’s stable income or a longer-term loan.

Bridging loans work like other secured debt finance: the amount you can borrow depends on the value of the asset you’re using as security. You might borrow against property, machinery, a piece of land, or something else entirely, but higher value assets are more common. Loan terms can last anywhere between one month to three years, but most lenders won’t offer bridging loans for longer than 12-18-month terms.

The important thing is to have an exit strategy in place, which proves to lenders that you’ll either be able to pay off the loan in full or move into a longer-term type of finance, such as a mortgage. Although bridging finance can help you access cash quickly, this type of funding comes at a higher rate of interest.

As with many other lending products, bridge loans vary when it comes to factors like repayment terms and interest rates. Here are a few types of bridging loans to be aware of:

Open bridge loans

These don’t have fixed repayment dates, but you’ll generally have to pay them off within 12 months.

 Closed bridge loans

These do have fixed repayment dates – and you might be offered terms like this if you’re waiting to close on a property sale, for instance.

Fixed rate or variable rate

Bridging loans can have fixed or variable interest rates. If the rate’s fixed, your monthly payment won’t change. If it’s variable, the amount you pay back will go up or down.

Another factor lenders take into consideration is whether you have existing finance on the collateral you’re borrowing against since this determines which lender gets paid first in the event of a default, or if the loan is refinanced or repaid. When lenders talk about this sequence of repayments, which is a bit like a queue of lenders, they use the terms “first charge” and “second charge” bridging loans, referring to who’s “first” or “second” in the queue to get paid back. They’re also known as “senior” and “junior” bridging loans, with the “senior lender” being the one who’s repaid first.

Let’s say you take out a bridge loan on a property that already has a commercial mortgage on it: in this scenario, the loan will be a second charge bridging loan, since the mortgage came first. If you were to default, the mortgage lender would take priority and the bridging loan would be repaid with sales proceeds. Here, the mortgage lender is known as the “first charge holder” or “senior lender”, and they have priority in all scenarios, including interest payment, refinancing and repayment. If the property you’re using as collateral doesn’t have any finance on it, then you’ll get a “first charge” bridging loan.

You could use bridging finance for almost anything really, regardless of sector, but since these types of loans are for the short-term and have higher rates, businesses tend to use them for big purchases, such as property. But there’s plenty of other reasons you might go for bridging finance, which we’ve outlined below.

Some business owners use bridge loans to invest in a large stock purchase, which also demonstrates to lenders that there is potential to make money from their investment and be able to repay the loan with that income.

Bridge financing can also be used to cover working capital, to tide your business through a period of reduced trading, for example. Likewise, if you’re about to receive a round of equity-based finance, but need a loan to cover costs such as rent, utilities and payroll in the meantime, you might take out a bridge loan for the period until the funding round is complete.

If you’re a property developer, you might use a bridging loan to buy a plot of land, especially if you want to act quickly and trump other potential buyers in the process. You can use a bridge loan to take you towards development too, where a bridging facility funds the acquisition (which is needed due to tight timescales), and would then be refinanced onto a longer-term development facility.

A planning bridge facility may be more suitable in cases where somebody purchases land without planning permission, then works to get planning in place and eventually exits through either a sale to a developer or refinancing onto a development facility.

Marketing bridge facilities are designed for delayed development projects, when a borrower needs more time to sell. A marketing bridge gives the developer that extra bit of time to reach practical completion, when the building work is officially finished. This way developers aren’t forced into a “fire sale”, where they sell prematurely for a price well below market value.

With commercial bridging loans, the amount you can borrow depends on what your security is worth, which is why more valuable items such as property and land are a better bet.

Let’s say you have a commercial property worth £1m. At OakNorth, the loan to value ratio (LTV) we tend to offer is 50-60%, so you could borrow up to £600,000.

One of the key differences between bridging loans and commercial mortgages is speed, as bridging loans can complete in weeks, rather than the months you might expect with a mortgage. Term length is another big differentiator: bridge loans are designed to be used for short periods of time, generally no more than 18 months, while you could take out a commercial mortgage over a term of decades.

Then there’s the interest too, which is typically higher with bridging finance than it is with commercial mortgages, since there’s greater risk to the lender. As with commercial mortgages, bridging loan providers may also charge arrangement, valuation and other administrative fees.

There are plenty of alternatives to bridge loan financing, such as commercial mortgages and traditional business loans with longer terms.

Invoice finance, where you borrow against money you’re owed, can help you release cash locked in overdue debt. This type of finance is common among smaller businesses which need quick cash to cover a cashflow gap or an unexpected bill. You might opt for a commercial mortgage rather than a bridging loan if you own a property outright; by entering into a longer arrangement, you could save money on interest, but have less flexibility.

Applying for bridging finance with OakNorth is easy: all you need to do is fill out this short online form, and a member of our debt finance team will get back to you.

At OakNorth, we provide quick ‘yes’ or ‘no’ decisions and deliver funds in weeks rather than months.