There are several reasons why a business may wish to raise finance – due to expansion, new offices, more equipment, staff overheads, stock and more.
A bridging loan allows individuals and firms to access large sums of money within a few days when it is needed, in order to ‘bridge the gap’ of a financial opportunity that will be more expensive to wait longer for a more traditional loan.
Bridging loans range from £10,000 to £10 million and are considered a temporary solution for around 12 months, not long-term like a personal loan or mortgage.
To give a practical example of its use: a fast-growing start up wants to purchase new premises worth £1 million to accommodate their staff and customer demand. The firm realises that they can generate huge revenue if they move in quickly rather than wait months for a mortgage to go through and potentially lose the property.
Terms of the loan
A bridging loan is typically secured so a business would be able to put their existing property down as collateral, which is why this type of loan is common for property investors and buy to let property developers.
If the borrower fails to repay the loan and interest, the bridging lender still has a stake in the property and will be able to repossess the estate and re-sell it to recover lost income.
Other things that a business can use as collateral include:
- their own business (stake in the company)
- premises (office, desks and chairs)
- equipment (computers and servers)
- client invoices and sales
The cost of bridging finance usually consists of monthly interest rates and arrangement fees. The amount you pay will depend on the lender’s rates, the value of your collateral, property price forecasts and the borrower’s credit rating.
Lenders will typically compound the interest into one large repayment at the end of the loan term. This is because the end of the agreement is usually when you should have enough to repay either because you have sold your property for more than you bought it or generated more revenue through your business.
Using an example from MT Finance, a business borrows £1 million for a new property for 12 months. After succeeding in underwriting, they are given a 75% loan to value and charged 1% interest per month.
So the business will be able to borrow £750,000 and pay £7,500 interest per month which equates to £90,000 in interest per annum plus arrangement fees.