How to use a Bridging Loan to Buy Property
Are you thinking about purchasing commercial property? Although property ownership presents many advantages to your business, the will, no doubt, already appreciate how expensive the UK property market can be. As such, you may not possess the necessary funds to pursue and achieve your property goals but, rather than abandon your aspirations or deplete your business’ savings, taking advantage of a Bridging Loan could show you the way forward. So if your business stands to benefit from having a permanent place of trading or a larger portfolio, some of the questions you need to ask include…
How can I raise capital using a Bridging Loan?
What makes Bridging Loans so popular with business owners, developers and buy-to-let landlords is that they’re often viewed as a fast-track way of raising funds for property purchases - and for good reason. This is possible because Bridging Loans are often secured against property which helps to raise the lender’s confidence and, depending on the complexity of the request, may allow decisions to be made in as little as 48 hours. Plus, because Bridging Loans are based on the market value of the property concerned, there’s no limit regarding how much you could borrow other than what the lender is willing or able to provide.
How do I qualify for a Bridging Loan?
As well as providing property as security (such as your own home or the property being purchased), lenders will naturally want to know whether your business can afford the agreement. The first thing they’ll want to review is your exit strategy, which should discuss how you intend to raise the necessary funds to repay the agreement on time. Are you selling other property from your portfolio? Are your releasing equity in your own home or business assets? Whatever your plan may be, you need to make your strategy clear and simple to understand for the lender.
In addition to submitting documents such as recent and past bank statements to Profit and Loss statements amongst others, lenders will also want to review your credit profile (both personal and business). This enables lenders to review your financial situation and the viability of your plans and will incorporate into their checks whether you have past or recent CCJs, Accelerated Payment Notices, existing debts (e.g. credit card debt) and whether you have a reliable history of resolving debt on time. So, although Bridging Loans often charge high interest rates, the strength of your credit score directly affects the rate that you’re offered. Therefore the weaker your score the more interest you’re charged, and vice versa.
How are Bridging Loans repaid?
If you’re thinking of using this option, you need to be aware that Bridging Loans are unlike any other financial solutions you may otherwise be aware of. This is because the principle (capital borrowed) and the interest are treated as two separate entities. As such, you first need to decide when you’re going to resolve the agreement through choosing either an Open Bridge or Closed Bridge product:
- Closed Bridge: With a Closed Bridge, you’re obliged to repay the product by an agreed date. As such, this solution could prove useful when you’re looking to purchase a property for 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.
Next, you then need to decide how you intend to resolve the interest on the agreement. To offer you flexibility in this area, Bridging Loans present you with 3 options - Monthly Interest Payments, Rolled-Up Interest and Retained Interest:
Pay Monthly: With this option, 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: Here, the interest that you would have 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.
Thinking about purchasing property for your business?
For any business, owning property presents many advantages, including control over your monthly outgoings (as opposed to renting), greater market penetration and brand reputation. However, property in the UK is highly prized, making it an expensive goal to fulfil. But rather than drawing upon your own savings, there is another way in which you could raise the funds your business needs. Bridging Loans are short-term finance solution lasting up 12 months that can be arranged in as little 48 hours. However, as always, it pays to go forward having made an informed decision, which is why speaking with a qualified business finance professional could prove invaluable.
At Rangewell, we’re an Access to Finance specialist and have independently mapped over 400 lenders to offer business owners an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. So if you’re looking to purchase property, expand into another location or even re-bridging an existing bridging loan, apply for a Bridging Loan today or find out more with Rangewell.