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Bridging loans and bridging finance
Bridging Loans are a type of short term funding to close the gap between owing debt and the payment date. The majority of these loans involve property – i.e., completing the purchase of a property before selling the current home.
A bridging loan is essentially a short-term loan to fill the gap between purchasing and receiving the finance or mortgage to pay for the property.
At Trade Finance Global, our team can not only assess and advise your business, but also suggest the most appropriate bridging financing mechanism, working with expert bridging loan experts to help bridge payment gaps.
Why use a bridging loan?
In the short term, a bridging loan is easy to arrange and often funds can be released within a short period, as little as 24 hours.
The scope of bridging finance means that they can help bridge business funding gaps while longer-term finance is arranged.
What can bridging loans be used for?
- Home-movers (payment gap between purchasing and selling)
- Quickly renovating a home to then sell on
- Buying at auction
- Business Bridging Loans
Other uses:
- Paying a tax bill
- Financing a new startup or business
- As an alternative to invoice finance
- Settling a divorce
- Extending a lease
- Refinancing other loans
A bridging loan could be used to buy a property before selling the existing home. The loan would cover the purchase of the new property, whilst the property owner sells the current property and waits for completion.
As well as helping home movers, bridging loans can also facilitate the renovation of a property if the purchaser is looking to sell-on shortly after a property makeover.
Often when bidding on a property during an auction, full funds are required to buy the property outright normally within 28 days from a successful bid. You’re often required to also pay 10% of the purchase price as a deposit, which is non-refundable.
Bridging loans can often cover the full price of the property as well as funds and fees, to enable the purchaser to secure a property at an auction.
If the director or a senior partner within a business leaves whilst another will continue to run the business, during the process of an MBI (management buy in), a bridging loan can be raised to ensure the business operations remain unaffected. The bridging loan would be made on the basis of the company value.
Who are bridging loans for?
Typically, bridging loans are for landlords, property developers, and sometimes wealthier individuals looking to complete a residential mortgage quickly.
Borrowers tend to need to complete or access finance very quickly, which is why they exist.
How much are bridging loans?
Due to the short term unusual nature of bridging loans, interest can be 1-2% per month.
Bridging loans also come with legal and administration fees, so if you’re looking to get a bridging loan as opposed to a normal loan, you should consider the additional fees.
It’s also important to consider an exit strategy, bearing in mind the size of interest repayments and the fact that a property or company is often used as security.
How long can you get a bridging loan for?
Bridging loans are a short term financing product, ranging from a few days to 2 years, but typically are used for 2-3 months.
What types of bridging loan are there?
There are two main types of bridging loans: open bridging loans and closed bridging loans:
Open bridging loans are for those who haven’t yet agreed finance sources (e.g. a principal agreement for the sale of your house, but nothing contractual). Because of the risk, open bridging loans tend to be slightly more expensive than closed bridging loans, which are explained below.
Simply put, closed bridging loans are for those who have already exchanged contracts, pre-agreed a concrete offer of a mortgage from a bank, and generally guarantee paying back the loan in the near future. Because of this, closed bridging loans are generally more affordable and charge lower interest than open bridging loans.
Are bridging loans safe?
Bridging loans are secured – meaning that failure to repay can mean that the borrower stands to lose that asset. To avoid defaulting, borrowers need to be in a comfortable financial position and have a clear ‘exit route’ which is often a requirement when applying for a bridging loan.
First charge bridging loans mean no other borrowing is taking place. However, second charge bridging loans mean borrowing is occuring (i.e., the borrower has an existing mortgage).
I was able to work with Trade Finance Global to arrange a bridging loan which enabled me to buy a property at auction, refurbish it over the course of 6 months, and then sell it on and expand my property porfolio.
Case Study
The company based in Glasgow required a bridging loan whilst undergoing an MBI (management buy in), as one of the shareholders left the company and the operations needed to continue whilst they sought a replacement.
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