What is a Bridging Loan?
If you’re looking to move into your first business premises or to expand your property portfolio, acquiring the necessary cash to achieve this goal can be challenging – especially if you don’t know how. But rather than using your own cash reserves, you could apply for a Bridging Loan.
Bridging Loans are a flexible form of short-term business finance that could be agreed within 48 hours of applying, depending on the complexity of the request. So, whether you’re a property developer, business owner or an investor, applying for a Bridging Loan could offer you a number of advantages. But in order to make an informed decision, you need to understand what Bridging Loans are and how they work.
- What is a Bridging Loan?
- What types of Bridging Loan are available?
- What charges are involved?
- How are Bridging Loans repaid?
What are Bridging Loans?
Bridging Loan terms typically last up to 12 months and can be used for a diverse range of purposes including property purchases, refurbishments, renovations, or emergency funding. This type of finance is often secured against either residential or commercial property. Depending on your business’ current circumstances, you could acquire up to 80% of the total cash requirement for any project or goal you’re looking to undertake, possibly more. Although there’s no upper limit to what you can borrow, funding starts from a minimum of £10,000.
What types of Bridging Loans can I choose from?
A flexible form of finance for your business, Bridging Loans offer an array of benefits. But, in order to make an informed decision and choose a product that’s suitable for your current circumstances, you need to understand what solutions are available. If you’re interested in applying for a Bridging Loan, there are two types available: Closed Bridge and Open Bridge.
- Closed Bridge: With a Closed Bridge, you’re required to pay back the product by an agreed date. As such, this solution could prove useful when you’re looking to purchase a property or a business, and a completion date has been agreed between you and the current owner.
- Open Bridge: An Open Bridge doesn’t tie you down to a specific repayment date, so you’re able to repay the product as soon as you’re able. Nevertheless, lenders may declare a cut-off point which makes clear how long they’re prepared to wait for the loan to be fully repaid. As such, this particular product’s flexibility makes it suitable for funding business projects, refurbishments, renovations, settling financial obligations, emergencies and so on, which have no set completion date.
Are there any additional costs involved?
Although this can vary between lenders, Bridging Loan providers may charge additional costs and fees that may need to be paid upfront or at the end of an agreement, which should be made clear to you inside an initial Agreement In Principle (AIP) document. As well as interest, some of the costs that you may encounter with a Bridging Loan may include arrangement, administration, legal, facility, exit fees and valuations. Therefore, if you’re unsure about the total cost of finance, or how these costs are structured, request that they thoroughly explain them and how they work before committing to any agreements.
How are Bridging Loans repaid?
When offering a Bridging Loan to your business, lenders usually expect the agreement to be settled within 12 months. If you have the means to do so, you can also repay a Bridging Loan early. But before doing so, check with your lender and ask whether you’ll need to pay a fee. Because Bridging Loans often carry a higher rate of interest than your typical term loan, shorter terms can be more cost-effective for you as a borrower. But when it comes to repaying a Bridging Loan, it depends on the type of product you’ve applied for, how you intend to raise the necessary funds and how you choose to handle interest.
Repaying a Bridging Loan depends on your exit strategy, which must state how you intend to handle the interest and repay the principal (or the money borrowed). Although choosing between Closed Bridging and Open Bridging dictates how the principal on the loan is repaid in order to conclude the agreement, you’re still left with the matter of how to deal with the interest in the run-up to this point. Because the interest rate for Bridging Loans is particularly high, lenders allow you to handle it separately using one of three options: Pay Monthly, Rolled-Up Interest or Retained Interest.
- Pay Monthly: Here, you pay back the interest at the end of each of month, based on the amount of money you’re borrowing. When you’re able to, or if a set date has been agreed, you then pay back the money that you’ve borrowed, concluding the loan.
- Rolled Up Interest: With Rolled Up Interest the interest that you would’ve incurred at the end of each month is totalled up and put together with the money that you’ve borrowed. So instead of monthly interest payments, this options enables you to simultaneously pay both the interest and the principle in a single final payment at the end of the agreement. 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.
- Retained Interest: By choosing Retained Interest, you’re able to borrow the interest that would be payable for an agreed number of months on top of the sums you are requesting. This is then held back by the lender and is used to help support the monthly interest payments that you’re required to pay each month until the product’s principal has been fully repaid. 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.
Looking for quick cash for your business?
Getting the cash you need can be difficult, especially at short notice. Thanks to the Alternative Finance Industry there are plenty of different business finance solutions to choose from. The only obstacle now is identifying which product is suitable for what you’re business needs. Luckily, we’re already on top of it. By applying for a Bridging Loan you could acquire up to 80% of the cash you need to support your business, usually in as little as 48 hours. So if you’re in need of quick cash and are able to offer property as collateral, apply for Bridging Finance today, or find out more with Rangewell.