Are Bridge Loans a good idea?

By David Harrison
Content writer
Last update: 17 March 20201 minute read
Are Bridge Loans a good idea?

Table of Contents

For many UK businesses, having access to permanent premises is important for being able to trade and connect with customers. However, UK property prices are very expensive and this discourages many SMEs from stepping onto the property ladder, but rather than abandoning your goals or depleting your savings, you could explore how applying for a Bridge Loan may help. Bridge Loans are short-term finance solutions that are designed to assist with a number of property-specific goals. They can be an ideal starting point to purchasing premises, but before rushing into a Bridge Loan agreement, you need to assess whether this type of funding is suitable for your financial situation and aspirations. So, are Bridge Loans a good idea for your business?

Have I got an exit strategy?

When dealing with a Bridge Loan, it’s essential that you have an exit strategy in place, ie. do you know how you’re going to raise the necessary funds to repay the agreement?

Will you be using the proceeds of a property sale? Refinancing unencumbered assets (equipment, machinery or vehicles) in your business? Or are you going to raise capital using another business loan? Before any lender considers offering you an agreement they will want to know that you have a credible plan for repaying the funds on time, especially since Bridge Loans traditionally carry high-interest rates. Plus, on top of interest, failure to repay to a Bridge Loan on time will also lead to your business being charged late payment penalties. Therefore, it is important for your business to be well-prepared and understand how this finance solutions works before applying, whilst also being aware of other types of property finance, such as Commercial Mortgages, which may be more suited to your individual situation.

Are you planning on purchasing your first business premises? Or are looking to expand your portfolio? Apply for Bridging Finance or learn more about how your business could benefit.

How much can I borrow using a Bridge Loan?

If you’re thinking about applying for a Bridge Loan, it’s worth noting that although funding starts at £25,000 there’s no set limit to what you could borrow other than what the lender is willing or able to lend. The reason for this is that funding is based upon the value of the property you’re purchasing or releasing equity from, with funds being made available in as little as 72 hours after applying. In addition, Bridge Loans aren't subject to any usage restrictions, but are most commonly used in purchasing or releasing equity in property and land (commercial and residential).   

How can I repay a Bridge Loan?

In order to understand how Bridge Loans are repaid, you need to treat the Principle (money borrowed) and the Interest as two separate aspects of the agreement, which can be tricky because of the variety of options that are available. However, to deal with the Principle, you first need to decide whether you wish to apply for a Closed Bridge or an Open Bridge product.

  • Closed Bridge: with this option you need to agree precisely when the Principle on the agreement needs to be fully repaid. This can be useful if you’ve agreed on a purchase date with the seller or have identified when you should have the necessary capital available to settle the agreement (e.g. the sale of a property in your portfolio or through another finance agreement.)

  • Open Bridge: these solutions, on the other hand, require you to repay the agreement within an agreed period, which can be helpful if you’re not too sure on an exact date when the sale will go through or when you expect to possess the necessary capital for repaying the loan.

Once you’ve agreed on how you intend to pay down the Principle, and when, you then have to consider how you’re going to resolve the interest: Pay Monthly, Rolled-Up Interest or Retained Interest.

  • Pay Monthly: this means that you’ll be paying the interest on the agreement at the end of each month based on how much capital you’re borrowing. When you’re able to, or if a set date has been agreed, you then resolve the principle on the loan, concluding the agreement.

  • Rolled-Up Interest: this combines the Principle and the total amount of interest you’ve incurred throughout the agreement, requiring you the resolve the debt in one single repayment. Although this could prove useful if your business is experiencing a low revenue period or if you’re unable to afford monthly interest payments, it will increase the size of the final repayment at the end of the term. However, this can be difficult to achieve if your business hasn’t generated the necessary capital by the time the agreement has matured, whether as a result of revenue shortfalls or a separate finance application falling through.

  • Retained Interest: this option, on the other hand, allows you to borrow a portion of the interest that you will incur throughout the agreement for an agreed number of months, on which you are also charged interest. Although this is retained by the lender, it acts as a protective buffer, helping you stay on top of the monthly interest payments until it’s time to resolve the Principle. If you haven’t used up all of the interest that was retained, or have managed to fully repay the loan early, lenders may reimburse a portion of the unused interest back to your business.

Are Bridge Loans a good idea for your business?

Although property is a precious commodity in business, many SME owners still shy away from investing in this area due to the large cost outlay that’s typically required. This is both unfortunate and unnecessary, especially since there are a number of finance solutions available, one of which includes Bridge Loans. However, before applying, you need to ensure that you’re making an informed decision for your business, which is why you should consider speaking with a qualified business finance professional beforehand. 

At Rangewell, we’re an Access to Finance specialist working with over 350 lenders to offer you a comprehensive overview of more than 23,000 business finance products, including property finance. Our services are free to use and we’ll also guide through the entire application process. We’re with you every step of the way. So if you’re looking to purchase to property for your business, or even re-bridging an existing bridging loanapply for Bridging Finance today or contact us to find out more.

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