Bridging loan

Quick facts

Amount

£25,001 to £100m (maximum 80% loan-to-value ratio)

Term

Typically up to 12 months but can be up to 3 years

Cost

Interest rates are usually higher than traditional term loans (plus typically a 2% arrangement fee)

Speed

From 24 hours

Purpose of finance

Broad range

Suitable for

Any business with security (property or inventory)

What is a bridging loan?

A bridging loan is a quick-turnaround, short-term loan (usually less than 12 months) made to an individual or business until either this loan can be cleared in full or a more permanent source of funding secured.

You can think of a bridging loan as a temporary loan that gets you from A to B, hence the ‘bridge’ idea. These loans can be secured against all types of property, including property that other lenders might deem unsuitable, and also against inventory.

They are quick to arrange (from 48 hours) because typically they have flexible lending criteria and don’t need extensive checks.

You’ll often hear ‘bridging loan’ used in the context of domestic or commercial property purchases, but you can use bridging finance for any commercial purpose, as long as you have a clear exit in place. In other words, a lender will want to know that, at the end of the term, you can either clear the bridging loan in full (with interest) or move it on to a more permanent type of finance with a traditional lender, e.g. a term mortgage.

Why choose a bridging loan?

You might consider a bridging loan if you are:

purchasing land or property
re-bridging or extending an existing bridging loan
expanding (or consolidating) your business
paying off your business debts
paying your HMRC tax bill
avoiding repossessions

You’ll also hear the terms ‘re-bridging loan‘ or ‘bridge extension’. If you’re approaching the end of the term on your bridging loan and your exit plan isn’t happening, you’ll need to arrange a new bridging facility to replace your existing loan (re-bridge). You can either opt for a bridge extension with your existing lender, or you might find you’re better off moving your loan to a different lender.

Pros and Cons of a bridging loan?

Quick access to funds (24 hours from application)
Can be used for a variety of purposes
Usually without exit fees

!      As bridging loans are usually there to ‘bridge’ one loan to another, it can incur high interest charges
!      Not currently regulated by any UK regulator so both lender and borrower at risk
!      A range of fees can add to overall cost

Is it suitable for an SME?

SME’s often may find themselves shut out from the traditional lending market. As most businesses struggle to survive in the critical first 24-36 month period, many banks and lending institutions are wary of lending to businesses who have less than 15 employees and 2 years of successful trading history, a bridging loan may be a an option for a growing business that can leverage its growing prospects.

Have you also considered?

Depending on how long you think you’d take to repay the loan you can consider:

short-term business loans – usually between 3 and 18 months (often referred to as working capital loans)
‘term’ loans – usually between two and five years (‘term’ means medium- or long-term)
very short-term loans – including revolving credit facilities and other business overdraft alternatives
long-term loans – these can run from 3 to 30 years, require monthly or quarterly payments from cash flow or profit, might restrict other financial commitments (e.g. debts, dividends or principals’ salaries), and can require an amount of profit set aside for loan repayment
balloon loans – relatively small monthly payments, ending with final ‘balloon’ payment to pay off the remaining loan balance