The Rise Of Bridging Finance
Bridging Finance has experienced a rise in popularity in the last 5 years, in 2011 around £750million was lent through bridging. Fast forward 5 years and £2.83billion was lent in 2016 according to figures released by the Association of Short Term Lenders.
Companies and individuals are increasingly turning to bridging finance as mainstream banks tighten their mortgage lending criteria. The development of over 40 specialist lenders has created a competitive UK marketplace for this growing consumer group.
What exactly is Bridging Finance?
Bridging finance is a type of short term loan that is used when there is a strict deadline in place and alternative sources of finance would take too long to complete or would simply be unavailable. As a result, the person borrowing the finance doesn’t miss out on the opportunity.
As a bridging loan is short term finance, the term of the loan can be anything from around 3 – 12 months. However, depending on the project the term may be for up to 36 months.
The total loan amount can range from £25,000 to £25million; dependent on the circumstances of the case and the security provided. Typically, the security for bridging finance is a residential or commercial property, in some cases it may also be a stake in the business of the borrower.
Borrowers tend to repay the loan when they sell the property or business, which the bridging finance was originally obtained for, and they receive an injection of cash.
Who is Bridging Finance aimed at?
Bridging loans are most commonly used as a source of finance for landlords and property developers where a mortgage is needed quickly.
However, they can also be used by asset-rich borrowers for lending on residential properties or other ventures as discussed in the next section.
What can Bridging Finance be used for?
Property Purchases - a bridging loan is a popular option for those who are looking to move home, have found the home they wish to purchase but have not yet sold their existing property. Bridging finance reduces the risk of the borrower/s desired property being sold before they have been able to sell their own property.
Property Development – this tends to be the most common use of bridging finance. When a developer is looking to refurbish, extend or renovate a property and ultimately increase the value of the property they will need to raise funds in order to undertake the project. Whereas applying for a mortgage to cover the cost of the development could take several weeks or months, funds from a bridging loan can fill this gap. It is also useful for properties where planning permission is yet to be granted and the gap needs to be bridged until that time where permission is agreed to.
Start-Up Businesses – when initially setting up a new business there can be many costs involved from advertisements to office fit outs. A bridging loan can help to cover some of these costs and can then be re-payed once the business has started to make money.
Business Expansion – an established business may see an opportunity for growth however to achieve that growth they may need to hire additional staff or invest in new technology. The business will have calculated that the changes needed will generate increased revenue. Therefore, an option for the business is to obtain a bridging loan, using the business premises as security. This will mean that the businesses cash flow is not disrupted by the planned expansion.
Stock or Investments – some investors may consider using a bridging loan when they have spotted a great investment opportunity that needs an injection of cash. The finance can then maximise the return on their investment. As with all bridging finance applications these will be judged on a case by case basis and a security deposit will be required.
What are the costs involved?
- Interest rates will vary between lenders, anything from 0.5% to 2% per month.
- The broker who arranges the bridging loan for you may charge a broker and procurement fee. These will need to be factored in when working out costs.
- Additional costs to factor into the budgeting process are the typical costs involved with purchasing a property, legal, surveying (dual representation is required on many occasions) and valuation fees.
- By repaying your loan early you will decrease the amount of interest you pay however there may be exit fees payable.
What are the risks involved?
Bridging loans can be an expensive form of finance when borrowed over a long term. Some people believe that bridging loans are a way for them to purchase a property they wouldn’t realistically be able to afford. This is why it is vital to speak with an independent commercial broker who will go through the options available and discuss alternative solutions.
How can KDW Commercial help?
Our commercial department are whole of market brokers which means they will be able to give you the unbiased advice and using their experience and immense industry knowledge source a product that is right for you. If they don’t believe bridging finance is the best finance option for your product they will discuss alternative lending solutions with you.
Get in touch with the team to find out more:
Tel: 01727 85 22 99
E: enquiries@kdwcommercial.co.uk