Bridging loans are a great way for your business to take on a project that you might not have been able to otherwise commence, particularly if there’s a gap in your cash flow. You can use bridging loan financing for the development or refurbishment of a property, investing in new or existing property, or even to help you move from one property purchase to another.
A gap in your cash flow can be a frustrating impediment — especially if you’ve got objectives that you want to achieve right now, and when you’re anticipating a cash windfall in the future (for example, from the sale of a property).
As the name suggests, a bridging loan ‘bridges’ this cash gap. So you can continue to carry on working towards your business goals.
Before you take out bridging finance, the bridging fund lender will place a value on the cash windfall you’re anticipating and potentially offer you a good percentage of that value as a loan.
As your bridging fund lender is taking onboard the financial risks of the loan being repaid, they will then naturally work with you to help you meet your objectives and offer their expertise as required to find solutions to any problems arising.
The bridging fund lender is usually then repaid once the anticipated cash windfall comes through.
Bridging loans can be more expensive when compared to mortgages, and this is usually reflective of the increased risk involved.
Like most loans, once you have agreed terms with the lender, it is important that you stick to this agreement. Loans can become much more expensive if you default on the terms as the extra costs, such as for interest, can increase significantly in such situations.
Due to the increased risks involved, many banks don’t tend to issue bridging loans unless the arrangement is watertight. And even when a bank is willing to provide one, you’ll often find that a company that specialises in property bridging loans — for example like us, Buzz Capital — will be able to offer more flexible arrangements.
A common question is, ‘what is a bridging loan secured against?’ Ultimately, it’s important to remember, any bridging loan you take out will normally be secured on an asset, such as a property. So if the loan doesn’t look like it can be repaid, then the lender can potentially require that the secured asset be liquidated in order to try and make good on the loan.
Whilst bridging loans and mortgages have some similarities, they are also quite different for a number of different reasons.
For example, bridging loans are usually short-term finance arrangements. Designed to last, say, up to 6-24 months (or thereabouts) and can often be paid off earlier after a minimum period. Mortgages tend to be a much longer term option with significant tie ins and penalties for early redemption.
At a glance, mortgages can often appear cheaper because they seem to offer lower rates and monthly payment options. But when you take into account the much longer amount of time you have to commit to making repayments and any penalties, you’ll often find that it works out more expensive in the long run.
Are bridging loans expensive? True, bridging loans are more expensive than mortgages when compared on a monthly repayment basis. But because they’re offered over a shorter period of time, the amount that you’ll repay often works out to be less than with a longer term mortgage.
Another crucial difference, to reiterate a point I made above, is that bridging loans are often relied on in situations where (many) banks do not want to issue a mortgage. Most mortgage lenders won’t want to take on the risk. Bridge lenders are often more prepared to take a commercial view and offer a loan with an interest rate that reflects the risks involved.
Lastly, timing is often key when it comes to bridging loans. If a developer needs a loan quickly to purchase a property they want to develop, then mortgages aren’t usually the most immediate solution. Banks can take many weeks or months to complete a mortgage. Whereas a bridging fund lender can move a lot more quickly. At Buzz Capital, for example, we can usually move much more quickly than the banks (often, in a matter of days).
Ultimately, the decision varies depending on circumstances. Unregulated lenders, such as Buzz Capital, can offer more flexible arrangements but these must be for business purposes only, and are not able to provide loans to individuals for any kind of personal use. You should always consult with a suitably qualified financial advisor on whether a mortgage or bridging loan is suitable for you.
BuzzCapital is a B2B company. We only lend to businesses and can only do so due to regulations.
To get a property bridging loan that matches your circumstances, the best way is to just get in touch with a lender and ask them about the types they specialise in.
For example, at Buzz Capital, we can not only offer most types of bridging loans (the largest loan we have provided to date was around £1.5 million), we also specialise in smaller deals and “quirkier” ones. Let me explain a little bit more about what I mean:
As a small experienced company, we can offer a speed and flexibility that perhaps most others cannot. For us, finalising a deal can be as simple as having a quick talk about the situation with our team and then getting back to you with our impressions.
At BuzzCapital, we actively embrace smaller loans and typically close a deal in 1-2 weeks.
At Buzz Capital we typically can close a deal in 1-2 weeks. But the time taken can depend on how well organised the package is, and how transparent the borrower is in presenting the information. From experience, and assuming all the right information is in place, the legal process can be completed as quickly as a few days.
The cost of a bridging loan obviously varies depending on the level of risk and the complexity of the loan situation. That being said, we can give you some estimates of what you might be looking to pay back.
To go off ourselves as an example, at Buzz Capital we typically charge as low as 0.75% per calendar month for straightforward, low-risk loans — which is actually a very competitive rate when compared to the wider industry to my knowledge.
Our upfront fees are usually in the range of 1-3% of the overall loan size, although we can sometimes charge an exit fee.
Speaking from our point of view, we will always try to find a price point that fits with the borrower’s designs and expectations. Obviously as the risk increases the rates go up, and as the complexity of the arrangement increases, so do the fees. This is normal practice across the industry.
Bridge lending in the property sector is often accompanied by a ‘personal guarantee’ which involves the borrower agreeing to make the repayments of the loan via their own personal wealth if there is ever an issue repaying the loan on the assets you took the loan out for. Obviously, this puts personal assets at risk.
If you’re thinking of applying for a bridging loan, take some time to consider how you might have to repay the loan from your own assets or personal wealth if there is ever an issue with repayment.
Also remember, your lender will always try to work with you to ensure there are no problems, and use their experience to help you find solutions if there are. So let them know if you run into trouble. Transparency is key.
To get the best deal, you’ll need to do your research and scope out what type of company it is you’re thinking of borrowing from.
Look for reviews such as on TrustPilot or seek word of mouth referrals about the lenders you are interested in.
Some bridging loan lenders, unfortunately, have a reputation for being unscrupulous and tricky to deal with. So bear in mind that, if you strike up a loan with them, then you’ll be stuck in a relationship with that lender — and you’ll have to work with them — until the loan is repaid.
You’ll only find out what they’re like to deal with by engaging with them. Before you agree to a loan, ask yourself – is this lender likely to be a problem for me? Is this a company I can work with in order to find a solution? And — crucially — if I feel I am running into trouble with my repayments, is the lender approachable, and do I feel like I will be able to ask them for help?
With a fixed rate bridging loan, you’ll know upfront what you’re going to pay. The rate is locked in the entire time of the agreement.
The downside is, you’re also locked into the loan. So if for whatever reason you decide you want to repay your loan early, then you will usually have to pay a penalty if still within the minimum term.
Variable rates are more flexible. With a variable rate, you can often exit or repay the loan whenever you want, without fear of any penalties or extra fees. The downside is, with a variable rate you’re often charged a higher rate for the loan.
Another downside is that variable rate loans are sensitive to economic turbulence and Bank of England base rate changes. This economic uncertainty means that, ultimately, you won’t know how much the loan could cost you overall.
There are many different types of bridging finance options available for you to choose from. Let’s look at them individually.
A first charge bridging loan refers to a situation where a borrower has no existing charge over their property.
A “charge” essentially means that a lender has already taken a security in the form of a charge over your property, which could technically allow them to liquidate that property in the event of an extreme default scenario (think of a traditional mortgage on a house, that’s a classical example of such a charge).
A first charge loan is very attractive to lenders and typically banks will require one. You will usually be required to provide a first charge if you don’t have any other lender in place and if you want to draw funding against the value of your property.
A second charge bridging loan refers to a situation where there’s already a secured loan in place on the property, and then a second lender is required to “top up” the required cashflow with an additional loan and charge. The second lender then becomes the second charge lender.
The charges are usually ranked in time order (meaning that generally speaking the first charge holder has priority and no new lender can come along and put an additional legal charge on the same property without their consent).
As the second charge lender is usually only required to top up the funding of a particular business, they sit behind the first charge lender when it comes to repayments. So for examples once the secured property is sold, the first charge lender is repaid in first position
As such, second charge loans carry more risk for the lender, which can be reflected in the interest rate. However, they can still be an attractive option to borrowers who find they have a cash flow gap which the first charge lender is not prepared to fill.
Second charge lenders will often request that any first charge lender enters into an agreement with them in the form of a deed of priority, or intercreditor agreement. This can slow the process down as it can take time for both lenders to reach agreement, if at all, unless of course they have made such an agreement in the past.
Second charge business loans at BuzzCapital
At BuzzCapital, we have provided a number of second charge bridging loans as part of our business operations. By their nature, second charge loans are more complex than first charge loans. But there are methods of satisfying us that would not satisfy a bank.
For example, if we’re required to step in as a second charge lender, we can look at other business assets that you may have and include them within your collateral pool.
This way, you can have a collateral pool made up of a second charge on that main property but also maybe take an additional charge on other properties that you own, such as Buy to Let properties.
We can look at the value of all of these properties, rather than just look at the initial one.
A bridging loan is considered ‘closed’ if the property developer has a clear method of repaying the loan within the term, such as an agreed sale, sufficient to provide the required cash sum to repay the lender. Or in other words, it’s considered closed if the developer has a clear exit plan.
An ‘open’ bridge loan has a less certain exit route. If the developer can only speculate that they might be able to sell the property before the end of their loan term, then that certainty/lack of clear exit route is considered more open and risky.
Alternatively, some developers will have an idea to approach a bank to remortgage or refinance the loan on the property before the end of their bridging loan term, and once the bridging loan has served its purpose.
Remember, bridging loans help with speed. They can help you quickly acquire the cash needed to buy the property you want to develop. But they also usually have higher monthly payments when compared to mortgages.
So an exit route might involve a developer applying to a bank to provide a longer term low rate mortgage which can be used to pay off the initial bridging loan. In this process, the bridge lender would then release their charge to allow the bank to apply their first charge in priority.
A ‘re-bridging’ loan might need to be taken out if you’re approaching the end of the term on your original bridging loan and your exit strategy has not crystallised yet (for example, if you’ve got no impending sale opportunity yet, or no option as of yet with a bank to re-mortgage).
In this situation, you might want to ask your existing lender to extend the term of the original bridging loan amount, or approach another bridge lender for a new one entirely.
This was a common occurrence during the original Covid-19 lockdown period (as many development projects were unexpectedly delayed). But it’s still worth thinking about the length of the term that you’ll really need for your original bridge loan, because it can sometimes be difficult to convince your existing lender into refinancing the existing arrangement, and hard to find a new lender willing to cover it. Any new lender will usually wonder why the original bridging lender is not being cooperative.
When it comes to smaller loans, you might find that if you reassess your finances that it’s possible to fund a project with equity from your other resources, including from friends and family. Just recently, we had an exciting prospect turn down the offer of a bridging loan with us, once they realised that they could source the required £200,000 from their friends, family and their own resources.
So it is possible to approach either family, friends, or equity investors, if you don’t want to go through with the expenses of liaising with a formal bridging lender.
As for the larger loans that run into the millions, well most people don’t have that much money to draw on, so friends and family is a less likely option. However, with these larger sums of money involved, you’ll find that there’s almost always an institutional financier involved in the package somewhere.
I would always encourage you to be transparent with your lender, and to never hide any financial difficulties with them. Many borrowers hide their problems from their lenders because they’re worried what they will have to say about them. But that’s not usually how credible lenders think.
Actually (at least from my experience) your lender would much prefer it if you told them about an issue as it arises, so that they can quickly advise on strategies to mitigate that potential risk.
Remember, your lender is in this with you and they are often very experienced with dealing with problems underlying loans. They don’t want there to be a problem either. In fact it’s in their interest to be repaid promptly and without issue! So let them help you. This is also a great way to build trust and a relationship with your lender.
Transparency is crucial. So make sure, when choosing the lender you want to partner up with, that you feel certain you can approach them on such issues.
Let’s look at both of these more directly:
It’s not always essential to have an exit strategy locked down (i.e. a ‘closed’ bridging loan). But it is important to have a clear idea of what the exit is/how you intend to repay the loan within the term limit.
The more locked down you are on the exit strategy, the better. This is because the lender will be more confident, and judge there is less risk at stake, and therefore your monthly interest rates will likely be lower. In contrast the weaker your exit strategy, the greater the risk perception, and the higher interest rates you’re likely to pay.
We hope you enjoyed this article and that it has given you some useful insights into at least some of the questions that you may have. If you’re interested in applying for a bridging loan, please don’t hesitate to contact us either by email or phone.
Co-founder & consultant at Buzz Capital
Adam has over 20 years’ worth of experience in senior management and consultancy from across the property, digital, financial and creative sectors. He has worked in both senior management and consulting roles for various funds, institutions and accounting firms leading to the successful funding of over 60 businesses across these sectors.
In 2011 and 2017, respectively, Adam co-founded the Authentic Media Group and Fundamentally Games Limited.
In his free time, Adam is active in the charitable sector including as a founder member of volunteer led fund-raising group Bear-Patrol which in 2015 was awarded the Queens Award For Voluntary Service – the ‘MBE for volunteer groups’. He enjoys singing, hiking and cycling, and plays softball for the Brighton Beachcombers Softball Club.
You can find him on LinkedIn here.