Bridging Loans for Small Businesses
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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in bridging loans
Bridging loans for small businesses explained
What is a bridging loan?
A bridging loan is a short-term, interest only loan, which is secured against property in much the same way as a mortgage or secured loan.
How do they work?
A bridging loan is offered for a maximum term of 18 months, although some lenders will offer longer. Loans secured by first legal charge against your own home are restricted to a maximum term of 12 months. When taking out a second charge bridging loan for business purposes, the 12 month restriction will not apply.
The interest is usually added to the loan and paid as a lump sum when the loan is repaid. This is known as rolled up interest. Borrowers can choose to pay the interest each month, subject to proving that this is affordable.
How can a bridging loan benefit a small business?
A bridging loan can benefit a small business by giving them access to finance quickly.
As short-term bridging finance can be arranged quickly and with less onerous underwriting than other types of borrowing, you can access very competitive interest rates and flexible repayment options provided your exit strategy is fit for purpose. This short-term loan method of borrowing can be a great tool for small business owners looking to expand.
This allows decisions to be made quickly and with less time required to manage your application – especially when guided by a trusted bridging finance broker.
Using bridging loans to purchase a property
When a business owner is looking to purchase a property, a commercial property mortgage would usually be the most suitable product. There are exceptions to this, however.
Firstly, when the property being purchased needs heavy refurbishment or even change of use, a property refurbishment bridging loan would usually be more appropriate. This is because most lenders would not allow such heavy works to be undertaken on the property as part of the mortgage.
In this scenario, bridging finance would be taken out, the works completed and then the loan can be refinanced into a mortgage.
Where the works are going to result in an increase in the value of the property, you may also be able to borrow the cost of the works.
The second situation is when a transaction must be completed quickly. Commercial mortgage applications can take time and as such, they aren’t always appropriate when completion is urgent. This is common for auction purchases and when there have been issues with a mortgage application that means you must now complete quickly.
In both of these scenarios, it’s realistic to arrange a commercial bridging loan in around 14 days. These loans can also be used to fund bridging finance for land.
Using bridging loans when raising capital to fund a shortfall in cash flow
Where there is a need for a cash injection into your business and there is equity available, bridging finance could be an ideal option.
Unsecured business loans should also be considered; however, most lenders require a clear credit history and have strict lending criteria. As above, a commercial mortgage wouldn’t be appropriate where funds are required urgently.
By taking out a bridging loan and rolling up the interest, you would also benefit by not having monthly repayments to make. This can be particularly useful when cash flow is tight.
Key product features
Key features
| Max LTV | Up to 80% |
| Interest rate | From 0.43% per month |
| Charge types | 1st, 2nd & 3rd considered |
| Term | 1-36 months (maximum 12 months for regulated loans) |
| Interest type | Added to the loan, deducted or serviced |
| Completion timescale | 5 days – 3 weeks |
Criteria
- Residential, commercial property or land acceptable
- Available to individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals and pension funds
- Minimum applicant age 18 years – no maximum age
- Available in England, Scotland, Wales and Northern Ireland
- Adverse credit accepted (on a case by case basis)
Small business bridging finance criteria
Who can apply?
We can lend to the following:
- Individuals
- Non-UK based individuals
- Partnerships
- Pension funds
- Limited companies
- Offshore companies
Loan term
We can offer loans from 1 month up to 24 months.
What locations will you lend in?
We offer loans across the UK, including England, Wales, Scotland and Northern Ireland. We offer specialist bridging loans for properties in London.
Can you lend to borrowers with bad credit?
Yes, we’re able to offer bridging loans with adverse credit without issue.
How much can I borrow?
What loan sizes can you offer?
We offer loans from £25,000 with no defined maximum loan size. We can offer loans in the millions without issue.
What is the maximum loan to value (LTV) can you offer?
The maximum loan to value (LTV) depends on the security offered to the lender. We can offer the following:
1st charge residential – 75% LTV
2nd charge residential – 70% LTV
1st charge commercial – 70% LTV
2nd charge commercial – 65% LTV
Affordability
As the monthly interest is usually rolled into the loan, affordability isn’t usually a primary factor in assessing the loan. Where your chosen exit strategy is reliant on income, the lender may want to verify that you have the income required to meet your new lenders criteria.
Where the security property is to be sold and interest is rolled into the loan, affordability doesn’t usually factor in to any lending decision.
How is my maximum loan calculated?
Your maximum loan is calculated through the lenders maximum loan to value, alongside your chosen exit strategy.
Small business bridging loan rates & costs
What interest rate will I pay?
The rate charged depends on the security offered to the lender. For first charge residential security, we can offer rates from 0.43% per month. Rates of 0.43-0.65% are usually realistic.
For second charge applications, a rate of 0.75-0.95% per month would be reasonable.
Where the security offered is a commercial property is likely to achieve an interest rate of 0.65-0.9% per month.
Are there other fees to pay?
Yes, on top of the interest paid, you will also need to pay a number of other fees when taking out a bridging loan. The main ones are as follows:
Lender arrangement fee – Lenders charge a fee for setting up the loan, usually 1-2% of the loan amount. This fee is usually due when the loan completes and can usually be added to the loan.
Lender exit fee – Some lenders charge an exit fee, which becomes due when the loan is repaid. This is becoming less common and where possible, we always look to work with lenders who won’t charge you an exit fee.
Broker fee – Many brokers charge a fee for their service, this is usually paid on completion, however some also charge upfront fees. We don’t charge a fee for our service.
Valuation fee – This fee is paid to the lender to instruct a RICS surveyor to visit the property and complete a survey report on it.
Legal fees – You will be expected to cover both your own and the lenders legal costs, which is standard across bridging loan providers. These fees are generally paid late on in the application process, usually in 2 parts – the first when the solicitor begins their work and the balance on completion.
How to get a bridge loan as a small business
Who offers bridging loans to small businesses?
These loans are usually offered by specialist bridging loan lenders. The loans offered to small businesses can vary significantly, and as such so can the lenders offering them.
When borrowing against your own home on a 1st charge basis, you will need a regulated bridging loan. This offers you greater protection, and means your loan must be taken through an FCA approved lender.
2nd charge applications for business purposes, and those not secured against your own home are unregulated. Unregulated loans can be offered by regulated or unregulated lenders.
When working with an unregulated lender, it’s important that you do due diligence on any lender you’ll be working with the ensure their quality.
Working with a broker
A broker’s role is to protect you throughout the process and ensure that you’re securing the best deal. They will work with you and the lender to ensure that the application completes quickly and easily.
Not all brokers are FCA regulated – although we are – and as such, this is another area where due diligence on who you’re working with is key.
Choosing the right bridging finance to get your small business up and running
When looking to take out a bridging loan for your small business, there may be a number of ways to arrange the loan. If you already own the property that your business will be trading from, a commercial bridging loan could be the right option for you.
Alternatively, there may be cost savings to be made by taking the loan out against your home. This does come with higher risks should you fail to repay the loan, as your home may then be at risk.
When taking out a new bridging loan, it is recommended that expert advice is taken to reduce the risk as much as possible.
FAQs
Are these loans regulated?
Bridging loans for business purposes aren’t regulated, unless they’re secured by first legal charge against your own home.
Although these loans aren’t regulated by the FCA, you can deal with reputable lenders to protect yourself and your business.
What other finance products are available to small businesses?
When looking to raise finance quickly, the most natural alternative to a bridging loan would be an unsecured business loan. These can also be arranged in under 2 weeks, although the lending criteria are much stricter, and some may not qualify.
Longer-term borrowing which is less urgent may be much cheaper using a commercial mortgage or secured business loan. Both take a number of weeks to arrange and offer longer terms but will come with much lower interest rates in most cases.