Use bridging loans for fast property acquisition or development.

How to avoid the pitfalls.

Types of commercial property that can be bridged

Benefits of Commercial Bridging

Development bridging

Risks surrounding commercial bridging

How to help secure better rates on your commercial bridging loan

Interest rates on bridging loans

Commercial bridging for limited companies

Bridging loans are a short term method of borrowing money to help you out with a certain instance. In this case, commercial bridging loans help “bridge the gap” towards purchasing a property investment or funding business costs. There are quite a few similarities between commercial and residential bridging loans. For example, either of these bridging finances can help secure property at auction. In addition, they can also help speed up the process when a property chain is broken.

When taking out a bridging loan, it is classed as commercial when the property or building has a significant commercial element. Say you purchase a shop with accommodation above it for example. If at least 40% of the entire building is the shop, you may need to apply for commercial bridging.

This can be difficult to navigate as some lenders only offer residential bridging and most commercial bridging lenders operate via a network of brokers.

Commercial bridging loans are available as a first or second charge product. Second charge commercial bridging is less common However, you can still find commercial bridge lenders which offer second charge loans. The interest rates are higher and the max loan to value (LTV) available is usually no higher than 65%. Just be sure what you are asking for. Some lenders will only offer a second charge bridging loan as part of a larger loan e.g to add extra equity. A stand alone second charge bridging loan on a commercial property is harder to find

Types of commercial property that can be bridged

Businesses can make the most of bridging loans to bridge the gap towards the purchase of a commercial property. There are a wide variety of commercial properties that can have bridging loans secured on them. These properties include:

• Public houses and hotels
• Industrial units, garages and warehouses
• Petrol stations
• Retail units and Offices
• Care homes
• Farms and agricultural buildings
• Schools
• Doctors and dentists

Some lenders will not allow bridging loans on certain commercial properties as they may consider certain properties too high risk; it’s all subject to the specific lender and their criteria. You may have to provide a solid business plan and exit strategy to your lender to boost their confidence. You may also have to offer additional security.

Benefits of Commercial Bridging

As with all bridging loans, commercial bridging loans are a quick source of funding to help you acquire or renovate a project or investment. Due to commercial bridging loans being unregulated, your loan application is based on your rental potential or profit rather than your income. This means that they can be a lot more flexible to the borrower’s needs. However, should you be subjected to financial misconduct courtesy of the commercial bridging lender, the FCA will not be able to help you out. A tip here is to find a lender or broker which offers commercial bridging finance but is also regulated by the FCA as it also offers regulated mortgages. Whilst the product may not be regulated, the company is. Therefore they need to abide by the FCA’s principles and will not wish to give borrowers any cause to complain.

With bridging loans in general, you don’t have to pay back in monthly instalments like you would on a mortgage. Instead, you would repay the interest on the bridging loan at the same time as the loan itself. Therefore, they can be easily managed and quickly paid off. Bridging loans are usually repaid within a 12 month period. There are certain bridging products you can find with terms of up to 36 months. 12 month bridging loans are more common though as the longer your term is the more interest you will have to pay at the end.

Development bridging

It’s becoming common to acquire commercial property with the intention of developing and extending the property. Often into residential use. There are specific loans available which provide money to purchase the property and further funds to carry out the improvements.

These are available for experienced and inexperienced property investors/developers. Here are a couple of videos and notes to explain more

Risks surrounding commercial bridging

If you have got your numbers right and all party’s (e.g. your builder) are competent, then you should have no significant problems. Problems tend to occur where you have agreed to service the loan payments and run out of cash. Also, your project is delayed and you are not able to exit within the agreed term.

Commercial bridging is secured against the asset you have acquired so if you were to fall behind on your payments you could end up defaulting on the loan. When a bridging loan heads in this direction, the lender can impose different legal actions against you. These include:

County court judgements (CCJs)

CCJs are a UK court order that can be issued to you if you fail to keep up to date with payments that you owe. 

Statutory demand letters

Statutory demand letters are formal written letters sent out to those behind on payments. The purpose of these letters is to tell the recipient that they must pay all owed debt within 21 days.

Liquidation or repossession

Liquidation is the process that involves selling off assets at a heavily reduced cost. The money gained from selling off the assets helps pay the debts on the bridging loan.

Penalties or default rates

If you default on your agreed payments or repayment strategy the lender can charge penalties. You must read the small print on this. The most common scenario is that you don’t finish the project and exit in time. Some lenders will extend for a little longer to help out. Others may charge a fee for extending and a higher rate for the duration of the additional term. Others may even chargeback payments on interest for the expired term. Consequently going 1 day beyond the agreed term could cost many £thousands.

Always read the small print and go via an FCA authorised broker who is authorised to give mortgage advice. But ensure he/she is also an expert on bridging finance. Most mortgage brokers aren’t.

How to help secure better rates on your commercial bridging loan

There are several ways you can help secure yourself a better rate on your bridging finance when it is time to apply. It is all subjective and criteria vary from lender to lender. But, if you have these on your portfolio, it could make a big difference to your bridging loan:

Clean Credit 

You don’t necessarily have to have a good credit score or clean credit history to secure a commercial bridging loan. Lenders tend to base their decisions on rental profits and potential rather than how good or bad an individual’s credit history or score is. However, it is a factor for some of the bank owned lenders and could affect rates with all lenders.

The other way your credit score/history could play a factor in hurting your plans is if it could affect your exit strategy. For example, if you plan to get a mortgage to exit the bridge, make sure there is a lender available and get some indicative figures.

Exit strategy

Bridging works well if the purchase needs to happen in a hurry. However, beware of unscrupulous lenders or brokers. Some will happily help you buy with a bridging loan without enough regard for how you will exit it. Having a strong, well thought out exit strategy could be the deciding factor as to whether your application is approved or denied.

Lenders have more confidence in exit strategies that can clearly evidence the repayment of the loan capital, including any interest added. They will also look at the salability and mortgageability of the property. The more popular the property is, the more comfortable the lender will be with the agreement.

Beware. If you are not being asked to evidence your exit, consider another lender. If you don’t have a “nailed on” exit you could be paying high penalties to the lender if you overrun your agreed term. Always read the small print to understand the default rates and fees if your exit doesn’t happen on time.

A substantial deposit 

Commercial bridging loans usually require a higher minimum deposit. Lenders usually go for a 30% – 35% deposit depending on the market conditions and property type. But they have been known to ask for deposits higher than this to help mitigate any potential risks later down the line. A higher deposit normally means more options to choose from and the lower the rates you will be offered. For the best rates aim to borrow less than 50% of the value.

Remember, when you opt to add all the monthly interest payments to the loan, this reduces the amount of cash you get in hand. Therefore you will need a larger deposit or, if remortgaging, accept less disposable cash.

Previous property experience

Having experience in property is always handy when it comes to getting into commercial business. Little to no experience in property doesn’t mean that you can’t get a commercial bridging loan. Something you will need if you are a first time investor is a very strong exit strategy that will instil confidence in the lender. However, there are circumstances where more property experience is required. More property experience is usually required if you are considering a complex development for example.

Interest rates on bridging loans

The rates offered will vary depending on a number of factors; to mention a few:

• Loan to value = Loan amount, including any rolled up interest as a % of the property value)
• Additional security – can a charge be taken over another property to reduce the LTV
• Loan amount – some lenders have a max and minimum
• Credit history – the cleaner the better
• Purpose of loan – does it include an element of development
• Experience of the borrower – relating to the purpose
• Property type and condition – how easy is it to sell quickly
• Planning consent – do you have the consent to do what you intend
• Location – some lenders are regional
• The exit – how strongly can it be evidenced
• First or second charge

Rates are fluid dependant on the underlying base rates and costs of funds. At the time of writing, low loan to value residential bridging rates start below 0.5% per month. A comparable commercial bridging loan could easily be 0.2 above that.

If the LTV is high, or there are other factors which limit lender appetite, rates could be anywhere from 0.75% to 1.5%.

Compared to a regular residential mortgage these rates may seem high. However, remember bridging is intended to be short term and often to assist a profitable transaction. So build the costs into the profit and see if it is still a worthwhile venture. Talk to a competent, FCA authorised bridging expert to get some indicative costs and options before you commit to the project.

Commercial bridging for limited companies

There are always times while running a business when funds can slow to a crawl. Whether you are starting your first business or are an experienced entrepreneur, commercial bridging loans for limited companies are also an option. They work by securing the assets of the business as collateral. The owner of said business can then use the bridging funds to help with their business ventures. A business could raise money for separate business purposes secured against a property you own personally. However, if the money is being used speculatively to build up the business, expect to be asked about your exit. Making a load of profit isn’t guaranteed. Your exit needs to be.

Talk to an expert about commercial bridging

If the idea of acquiring a commercial property interests you. Or, if you still have any questions about commercial bridging, give us a call to see if we can help you out. All on a no cost, no commitment basis.