Bridging Loans: what are they and how do they work?Published on 23rd June 2018 2018-06-23T10:07:10+00:00 - Last update on 17th March 2020 2020-03-17T16:17:14+00:00
Purchasing property for your business? As anyone will tell you, the UK property market is very expensive. This presents a difficult challenge for enterprising business owners who may be seeking to move away from renting and into premises that they own outright. But, there is a solution to this obstacle, providing you know where to look. A Bridging Loan is a short-term finance solution that enables you to purchase commercial and residential property or land. So if you’re looking to move into your first premises, expand your portfolio or establish a new branch, here’s what you need to know about Bridging Loans.
Why should I use a Bridging Loan?
Bridging Loans are short-term finance solutions that are used to fund the purchase of property and land (commercial and residential). Plus, they can also be used to refinance an existing property in your portfolio. As such, Bridging Loans are invaluable financial tools that could help you establish permanent premises, expand into new markets, fund redevelopments or raise capital for any other property-related project. However, you need to be aware that they are also secured finance solutions which use either the property or land in question as collateral.
How do Bridging Loans work?
Although Bridging Loans are useful tools for your business, getting your head around them can be tricky. This is due to the Principle (money borrowed) and the Interest being managed as two separate aspects of the agreement. But to begin, you need to be aware that Bridging Loans are termed as either a Closed Bridge or an Open Bridge.
- Closed Bridge: defines precisely when the principle on the agreement needs to be fully repaid. This can be useful if you’ve agreed 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: on the other hand, these require you to repay the agreement within an agreed period, which can be helpful if you’re not too sure when the sale will go through or when you expect to possess the necessary capital for repaying the loan.
Meanwhile, you need to consider how you’re going to handle the interest on the agreement. Although Bridging Loans can last for up to 6 or 12 months (or 18 months with an unregulated lender) they often charge high interest rates, so resolving the agreement as soon as possible could save you money in the long-run. But unlike other business finance solutions where the interest is paid alongside your monthly repayments, Bridging Loans offer 3 options to choose from: Pay Monthly, Rolled-Up Interest or Retained Interest.
- Pay Monthly: means that you’ll be paying down the interest on the agreement at the end of each month based on how much money 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: combines the Principle and the total amount of Interest you’ve incurred throughout the agreement, requiring you to 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 the 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: on the other hand, this option allows you to borrow a portion of the interest that you’ll incur for an agreed number of months, which is also charged interest. Although this is kept 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 you’ve managed to fully repay the loan early, lenders may reimburse a portion of the unused interest back to your business.
Worried about the cost of property in the UK?
Although purchasing commercial and residential property can prove challenging, there’s no reason why you should slam the breaks on your business’ development. Although it can be tempting to draw from your own savings or ask for favours from family and friends, there are plenty of finance solutions available that can help you avoid pushing your business into a precarious financial situation. One pathway you may wish to explore is Bridging Finance. But before placing an application, speaking with a qualified business finance professional could prove invaluable in helping you make an informed decision.
At Rangewell, we’re an Access to Finance specialist working with over 300 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide through the 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 looking at re-bridging an existing bridging loan, apply for Bridging Finance today or find out more with Rangewell.
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