What you need to know about Commercial Bridging Loans
What can they be used for?
Commercial property is a valuable asset for many business owners, enabling you to produce your goods and services in order to generate an income.
The trouble is that the UK property market can be very expensive, but if you’re an SME owner looking to purchase a permanent trading address or expand your portfolio, climbing onto the property ladder needn't feel like an impossible goal. One of the products that you could apply for is a Commercial Bridging Loan. But the question is, is it a suitable solution for your business?
What can Commercial Bridging Loans be used for?
What makes Commercial Bridging Loans so useful is that they’re subject to little or no usage restrictions. Yet, because of the way in which they function, Commercial Bridging Loans are often used in property in order to support purchases and redevelopment projects. So if you’re looking to gain access to your first permanent trading address, expand your portfolio or carry out renovation work, a Commercial Bridging Loan could be what you need to achieve your goals. But as always, in order to make an informed decision, you need to fully appreciate how the product works.
How do I apply for a Commercial Bridging Loan?
If you’re considering a Commercial Bridging Loan for your business, the first thing is you need to show to lenders that you have an exit strategy. Bridging Loans are short-term solutions that can last up to 12 months, so lenders want to know how you’re going to raise the necessary capital to repay the agreement by the time it matures. For example, are you selling property within your portfolio or refinancing a valuable asset in your possession?
Lenders will also request permission to review both your personal and business credit profiles, allowing them to gain an in-depth understanding of your financial situation. As such, lenders will incorporate into their checks whether you have past or recent CCJs, accelerated payment notices (APNs), outstanding debts (e.g. credit card debt) and a history of resolving debt on time. If there are any issues, this will affect your credit score, which lenders will use to calculate the interest rate on the agreement. Therefore, the weaker your score the more interest you’ll need to pay.
In addition, Commercial Bridging Loans are secured products that typically use the property as collateral - this can be the property that your purchasing, redeveloping or another unencumbered property in your portfolio. Although this boosts lender confidence, this also puts the property in question at risk of repossession should your business default on the agreement.
How are Commercial Bridging Loans repaid?
What makes Commercial Bridging Loans so different from other business finance solutions is the way in which the Principal (money borrowed) and the Interest incurred on the agreement is handled. Firstly, you need to decide how you’re going to resolve the principal and when - you have 2 options, either to apply for a Closed Bridge or an Open Bridge.
- Open Bridge: An Open Bridge allows you to repay the loan as soon as you possess the necessary capital, usually within an agreed term that could extend up to 12 months. That said, lenders may specify a cut-off period expressing how long they’re prepared to wait for full repayment of the product. This form of Bridging Loan could prove useful when working with a business project that has no set completion date.
- Closed Bridge: A Closed Bridge, however, requires you to fully repay the loan by a specific date but still within a 12 month period, or term. This can be useful if you’re a selling property and have agreed on a completion date, for example.
Next, you’ll have to decide on how you’re going to resolve the interest. Before applying, it’s worth noting that Bridging Loans typically carry a high rate of interest which can range from 0.7 - 1.5% per month, but can be higher still depending on individual circumstances and the complexity of the request. Yet, in order to help you resolve the interest, you have 3 choices:
- Monthly Interest Payments: Using this option, you will be required to make interest payments at the end of each month until the principal on the loan has been fully repaid.
- Rolled-Up Interest: Here, the total amount of accumulated interest is combined with the total amount of money that you have borrowed. When you’re due to settle the loan, dpeending on which product you’ve chosen, both interest and the principal is repaid in a single, final payment. Note that this will increase the size of the final payment, so you need to be certain that you can afford this option.
- Retained Interest: With this option you are, in fact, borrowing the interest that would be accumulated for an agreed number of months on top of the money that you are already requesting. The amount of interest that you’re borrowing is then retained by the lender but is designed to offer you a safety net as you make monthly interest payments until the loan’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 retained interest that wasn’t used.
Thinking about applying for a Commercial Bridging Loan?
Although property ownership presents many benefits to the UK business community, many SMEs are often discouraged by the significant cost outlay that’s required. But rather than abandoning your goals or using your own funds, there is another way. Business Bridging Loans offer you a way of borrowing large lump sums at short notice, with some agreements able to be established in as little as 48 hours (depending on the complexity of the request). However, with so many different lenders to choose from, how can you be sure being offered a cost-effective solution from a lender you can trust?
At Rangewell, we’re an Access to Finance specialist who have mapped over 400 different 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 you through the entire application process. We’re with you every step of the way. So if you’re looking to invest in your business’ future, apply for Property Finance today or find out more with Rangewell.