Bridging Loans

For businesses in the UK, navigating financial timelines can sometimes present a challenge. Opportunities or necessities may arise that require immediate capital, but longer-term funding or an expected inflow of cash might not be available right away. This is where bridging loans can provide a solution, offering a temporary financial bridge to cover short-term gaps.

The Concept of Bridging Loans

A bridging loan is a short-term, typically secured, financial product designed to provide rapid access to funds. Its primary purpose is to “bridge” a funding gap between a current financial need and the availability of more permanent financing. These loans are often characterised by their speed of approval and disbursement, making them suitable for situations where immediate access to capital is essential.

You might also hear bridging loans referred to by other names, depending on the context or lender. Common alternative terms include “bridge finance,” “short-term finance,” or sometimes simply “gap funding” although some of these terms can be used for other types of business lending products, so make sure you check as it’s easy to be confused by these interchangeable terms. 

How Businesses Use Bridging Loans and for What Purpose

Bridging loans are versatile and used by businesses of all sizes, from sole traders and SMEs to larger corporations, primarily when speed and flexibility are paramount. Their applications are typically focused on property-related transactions but can extend to other scenarios:

• Property Acquisition and Development: This is perhaps the most common use for bridging loans. Businesses might use them to quickly purchase a property at auction where immediate payment is required ahead of receiving funds from other property via a sale or mortgage. They are also used to fund property developments, especially for builders or developers needing funds quickly to start a project before long-term development finance is in place or income.
• Property Chain Breaks: If a business is selling one commercial property and buying another, but the sale of the existing property is delayed a bridging loan can provide the funds to complete the purchase of the new property without losing the deal.
• Refurbishment or Renovation: Businesses might use bridging finance to carry out urgent refurbishment work on a commercial property to increase its value or make it suitable for a new tenant, with the intention of refinancing later.
• Business Opportunity Seizure: A time-sensitive business opportunity might arise that requires quick capital such as acquiring a competitor or securing a favourable stock purchase, where waiting for traditional loan approval could mean missing out.
• Tax Liabilities: In some cases, businesses might use a bridging loan to cover an unexpected tax bill to avoid penalties, with a plan to repay it from forthcoming revenue or waiting for funds to be released from another source.
• Solving Cash Flow Issues: While not their primary purpose, bridging loans can temporarily alleviate severe cash flow problems if there’s a clear and imminent exit strategy, such as an anticipated large payment from a client or investment.

How Bridging Loans are Structured

Bridging loans are structured differently from traditional long-term loans.

• Short-Term Nature: They typically have terms ranging from a few months up to around 18-24 months, sometimes longer in specific circumstances.
• Security: Most bridging loans are secured against property, which can be residential, commercial or land. The value of the security is a key factor in the loan amount offered.
• Interest Payments: Interest can be paid monthly, but it is also common for interest to be “rolled up” and paid back in a single lump sum at the end of the loan term, alongside the initial debt. This can alleviate monthly cash flow pressure but means the total interest paid will be higher. Interest on bridging loans can be costly, as they are intended to be short term solutions only. 
• Loan to Value (LTV): Where property is the security, lenders will offer a loan amount based on a percentage of the property’s value (LTV), which can vary but is often in the region of 70-80%.

Exit Strategies: A Key Component

A defining characteristic and an essential part of any bridging loan application is the exit strategy. Lenders will always require a clear, plausible, and realistic plan detailing how the borrower intends to repay the bridging loan. Without a robust exit strategy, a bridging loan is unlikely to be approved.

Common exit strategies include:

• Sale of the Property: The most frequent exit strategy, particularly for property developers or businesses using a bridging loan to purchase a new property before selling an old one is the proceeds from a sale are used to repay the loan.
• Refinancing with a Long-Term Mortgage or Loan: Once a property development or project is complete it might secure a standard commercial funding to pay off the bridging finance, or the bridging loan is in place only just whilst it takes the borrower to sort alternative funding, not depending on a project ‘finishing’.
• Receipt of Expected Funds: This could involve an anticipated large payment from a client, an inheritance or the release of funds from another investment.
• Sale of Another Asset: The sale of other significant business assets might be planned to repay the loan.

The strength and credibility of the exit strategy are paramount because bridging loans are not intended for long-term financing. Lenders need assurance that the capital will be repaid as planned and so it will scrutinise the exit plan for its viability. 

Main Considerations and Benefits

Businesses considering a bridging loan should weigh the following:

Considerations:

• Cost: Bridging loans typically have higher interest rates and fees compared to traditional long-term finance due to their short-term nature and the speed of access. The cumulative interest, especially if rolled up, can be substantial.
• Exit Strategy: The success of the loan hinges on the exit strategy. If the planned exit falls through (e.g., property sale is delayed or falls through), the business could face significant financial difficulties, including potential repossession of the secured asset.
• Risk: Like any secured loan, there is a risk of losing the asset put up as security if repayments cannot be met.
• Fees: Beyond interest, expect arrangement fees, valuation fees, legal fees and sometimes exit fees.

Benefits:

• Speed: Bridging loans offer rapid access to funds, often within days or weeks, allowing businesses to act quickly on time-sensitive opportunities or needs.
• Flexibility: They are often more flexible in terms of lending criteria than standard loans and mortgages.
• Short-Term Solution: They provide a temporary solution for short-term financial gaps preventing a business from missing out on opportunities or facing penalties.
• Variety of Uses: Their versatility makes them suitable for a wide range of property-related and other short-term business needs.

In conclusion, bridging loans are a specialist finance product that can be highly effective for businesses facing short-term funding gaps. Their suitability depends on a clear understanding of their higher costs, the necessity of a robust exit strategy and the specific, time-sensitive nature of the financial requirement.