Commercial Bridging Finance
Scott West talks us through commercial bridging finance.
What is commercial bridging finance and how does it all work?
Commercial bridging finance is a short-term loan, typically used for the purchase or refinance of an asset. You can use it for refurbishment, as well. It allows you to raise capital quickly.
It ‘bridges’ the gap between where you are now and what you want to achieve. You might want to refurbish a property, increase its value and rental income from it, or offload it. Bridging finance allows you to do those works in the meantime.
Who is commercial bridging finance for and how is it used?
It can be used by anybody. Typically we work with property investors, business owners, developers, landlords and other people in real estate.
It’s used for the purchase of a commercial building, like a warehouse, shop, office, care home… anything that's not residential. If you already own the asset, you can use bridging to fund refurbishment, refitting, change of use, planning permission and more.
You might be looking to flip a property - where you buy, renovate and sell. Bridging finance is suitable for that. You can use it to raise capital for business use. Perhaps you already own the asset, there's equity to use and you need capital for your current business. There are lots of different options.
How much can I borrow?
Bridging lenders typically offer from £25,000 up to £50 million plus. Most people fall within that range.
It depends on the asset, the borrower profile, their background and the asset. Most lenders will lend you 70% to 75% of the property value, but you can get a little bit more with some lenders depending on how the deal is structured.
The lending may reduce if the deal is higher risk - if there's poor credit involved; if the property is in an area deemed hard to sell in; if a sale is the exit or if the asset's unusual. You can find a slight reduction in Loan to Value there.
How long does it take to get a commercial bridging loan?
Speed is a huge advantage here compared to term finance. Funds can be released in as little as five to 10 working days. It really depends on how quickly the valuations can be done, plus the legals and other paperwork.
A key point here is that you get what you pay for. If you want a lender that's going to turn this around in five to 10 working days, you're going to pay a bit more on the rate for that. If you want to get it done within four to five weeks, which is what I would typically expect, we'd get normal rates.
What if I have bad credit? Can I still get commercial bridging finance?
Yes, you can. Many commercial bridge lenders are more focused on the asset and the exit of that loan facility than your credit history.
It does play a part if the exit strategy is refinance, for example, because if you have poor credit the commercial term lender we use afterwards might offer you less. That lender might also be less favourable with higher rates, which reduces your borrowing. The bridging lender may then have some concerns over how they will be repaid.
We can get you a bridging loan, but it's just about understanding how bad the credit is and the exit strategy. It might push up the rate slightly, that's all.
Do I need an exit strategy? What is this?
Yes, you need an exit strategy, although the lender might not necessarily ask for any details about it. You might just say sale or refinance and the bank will be happy with that.
Working with us, we're very keen to make sure there's an actual strategy in place. If sale is the exit, we would seek confirmation from valuers of what the sale value will be. If you plan to retain the property and refinance it to repay the bridge, we need to know what lenders are offering. What will the rates be and the loan size?
Sometimes we even get credit terms in advance - and then you know for certain that the bridging loan can be repaid. We're really hot on making sure there's something in place.
What other costs are involved with commercial bridging finance?
You're looking at a 2% arrangement fee paid to the lender, which is built into the loan facility. It doesn't cost you out of your own cash flow - it's built into the loan.
Valuation fees will be paid directly to the valuer, and could be a couple of thousand pounds, depending on the size of the asset.
You pay legal costs for yourself and the lender on a bridging loan. A standard transaction would cost around £1,000 for each. If it's a very large property or a property with lots of units and multiple leases, it could be higher than that.
One thing to bear in mind is that monthly interest rates can fluctuate depending on your credit record, the exit, how much you're borrowing and the strength of the asset itself. Best case scenario at the time of recording is perhaps 0.7% per month.
The worst case might be a very niche commercial property in an area that's not very saleable, with poor credit. In that case you could be looking at perhaps 1.2% to 1.3% a month. I rarely see them that high, but it’s possible .
How does the application process work and how can a broker help?
The process really starts with assessing the asset and the client to understand all the strengths and weaknesses of the case. We need to understand the entire deal and the exit strategy.
Presenting this correctly to a lender dramatically improves the efficiency of the underwriting, the ease of the case going through and reduces headaches for clients.
We need the usual things - an application form, a passport for ID, a driving licence as proof of address, the details of the property, your credit report and details of the exit strategy.
Those are the starting points.
Key Takeaways:
- Commercial bridging finance is a short-term loan for purchasing, refinancing, or refurbishing assets, allowing quick capital raising.
- It's suitable for property investors, business owners, developers, landlords, and others in real estate, primarily for commercial properties.
- Borrowing amounts typically range from £25,000 to over £50 million, with most lenders offering 70% to 75% of the property value.
- Loans can be released quickly, sometimes in 5-10 working days, though faster turnaround times may incur higher interest rates.
- An exit strategy is required, and while lenders may not always ask for detailed plans, having a clear strategy for repayment (sale or refinance) is crucial.
SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.