Bridging finance is a form of funding that businesses can use to plug gaps in capital required for important investments, operational needs and equipment or property purchases. 

So, what is a bridging loan, how does it work, and what are the main pros and cons to consider? We discuss this and much more to help you make an informed decision about whether it’s the right type of business loan for you.

What is a bridging loan?

As the name suggests, bridging loans are a type of short-term finance used by business owners who need an injection of funds to cover a gap in their cash flow or shortfall in funding for a future business purchase.

These loans are typically taken out over a few weeks or months, or up to a year, to ensure the business can operate when revenues are down (perhaps, during seasonal dips) or to prevent a large investment from impacting crucial working capital.

How does a bridging loan work?

Sometimes referred to as a bridge or swing loan, bridging loans are a type of secured business loan, which means you need property or other high-value assets to use as collateral. Typically used for commercial property purchases or business acquisitions, this short-term finance solution is popular for ensuring a prompt and smooth transaction. Loans are repaid in pre-agreed instalments with interest included or rolled up and paid at the end of the term, or you repay the loan through refinancing or from the future sale of the property/asset.

Commercial bridging loans usually incur higher costs and interest fees than standard small business loans due to their short-term nature and increased lender risk, but you benefit from fast access to the funds you need.

However, digital lenders like iwoca can also provide flexible business loans tailored to your needs, with quick and easy applications. Iwoca lets you borrow up to £1 million from a matter of days or months, with approvals within 24 hours and same-day transfer of funds, once approved. 

Explore the alternatives to bridging loans for your funding needs.

What can you use a bridging loan for?

A bridging loan is commonly used to support the purchase of a property or other high-value assets or investment needs. It can help you address short-term cash flow issues, cover unexpected costs during a property purchase or business acquisition or clear outstanding bills or liabilities. 

Here are some of the uses of a commercial bridging loan for property finance needs:

• Bridging the gap between the sale and completion dates in your chain
• Renovating a property and selling it quickly
• Buying a property at auction
• Investing in a property for buy-to-let purposes
• Purchasing a property under market value
• Buying an uninhabitable property
• Preventing the repossession of a property
• Expanding your business by quickly securing new offices or storage space

Bridging loans can also be used by businesses for various non-property-related purposes, such as:

• Resolving a short-term cash flow problem, e.g. if a customer is late paying a valuable invoice
• Paying off inheritance bills or corporate tax bills
• Clearing debts or unexpected expenses
• Purchasing an existing business

How to get a bridging loan

You can apply for a bridging loan via major high street banks, mortgage brokers or specialist lenders. To qualify, you’ll need to meet certain eligibility criteria and supply various documentation. However, as the loan is secured against an asset, the criteria can sometimes be less stringent than other forms of commercial finance.

When applying for a bridge loan, these are some of the things you may be required to provide or agree to: 

• Recent accounts, financial statements and track record
• Key business and ownership details 
• An outline of assets to be used as collateral to secure the loan
• A clear business plan
• Profitability and forecasting (to be evaluated alongside your credit file)
• Details of any existing credit facilities and funding sources
• Overview of your funding purpose, together with how you’ll repay the loan

If the loan is for a property purchase, you may be able to take out a mortgage with the prospective bridging loan provider.

How quickly can I get a bridging loan?

One of the reasons businesses use commercial bridging loans is the speed they can access key capital for their funding needs. The timescale can depend on how promptly you supply key details and financials, and how long lenders take to assess them. However, you can expect the process to take a few days or up to a couple of weeks for more complex arrangements. Digital lenders can often fast-track this to as little as 24 hours, depending on your circumstances.

How much can you borrow with a bridging loan?

The amount you can borrow with a bridging loan depends on the property (or asset) you’re securing the loan against. This usually ranges from 65% to 80% of the total asset value.

Once the value of the asset being used as security is assessed, the lender will provide a quote based on your loan-to-value (LTV).

How much you can borrow also depends on your creditworthiness. So, if you’re considered a high-risk borrower, the LTV could drop to 50%.

It’s possible to borrow funds equating to 100% LTV, but this would likely require you to put up multiple properties to secure the loan. This will cost you more in extra valuation fees and could be risky (and costly) if you’re unable to repay the loan, as your properties (or assets) can be repossessed.

How much does a bridging loan cost?

The cost of using a bridging loan very much depends on the value of the asset it's helping to fund, the loan term length, the LTV offered and interest rates offered, plus any other fees involved, including valuations. Bridge loans for property purchases usually incur greater costs, due to the additional legal and industry-related activities and fees involved.

Let’s look at bridge loan interest fees and how they influence your cost of borrowing.

Bridging loan interest rates

When considering bridging loan interest rates, you need to choose between fixed or variable rate loans, your term length (and therefore, how long you’ll accrue interest) and the method of paying the interest. Let’s break this down. 

Fixed and variable rate bridging loans

Bridging loan interest rates are either fixed or variable, just as they can be for savings accounts and mortgages.

Fixed-rate bridging loan: With this interest rate, you know exactly how much interest you’ll be paying throughout the loan, provided it’s a closed bridging loan. This is more suitable if you’re looking for stability. However, because you’re getting the security, there’s the possibility it may end up costing you more.

Variable-rate bridging loan: Here, the interest rate can change, depending on fluctuations in the base rate. There’s more of a risk involved, but there’s also the potential to save money.

How do you intend to pay back the interest?

As bridging loans are short-term finance options, the interest is calculated monthly, rather than an annual percentage rate (APR), typically 0.5-1.5% per month. How you pay back this interest tends to be in one of the following ways:

• Monthly: You pay the interest every month, and it’s not added to your final balance.
• Rolled-up deal: No monthly interest payments are made. Instead, you pay all the interest at the end of the term.
• Retained interest: When you apply for the loan, you borrow the amount needed to cover the monthly interest payments from the lender. At the end of the term, you then pay everything back.

How much interest will you pay on a bridging loan?

Lenders charge interest on the amount that you borrow. These interest rates tend to be higher than other forms of finance, such as traditional bank loans and small business loans, due to the fast provision of funds and their short borrowing periods. 

There are various ways to pay the interest accrued, but by the end of the loan term, you’ll need to repay the original loan amount, plus all interest charges. 

Bridging loans can be repaid in pre-agreed periodic instalments or via one of the following ways:

• Refinance
• Property or sales assets
• Inheritance
• Receipt of money owed
• A policy reaching maturity (with a potential balloon payment)

How long can you get a bridging loan for?

Bridging loans are a short-term form of finance, typically taken out for less than a year and, in some cases, for only a few weeks.

Longer terms do exist, but you’re unlikely to find anything over three years. It’s also worth remembering that the longer the term, the more interest you’ll have to pay over the loan period. So, even though you may pay higher interest fees with a short-term loan, it can be more cost-efficient to borrow the funds for a shorter time. Consider the total cost of borrowing.

Is your bridging loan for a business or residential property?

A bridging loan is referred to as a commercial bridging loan when 40% or more of the land is for commercial use. If you’re using the loan to help fund a property purchase, you’ll need to specify if it’s for residential or commercial use.

For example, you might be interested in purchasing a shop that has flats above it, with both covered by the sale. Therefore, to be eligible for a commercial bridging loan, the retail space on the ground floor must represent 40% or more of the total floor space of the property.

Regulated and unregulated bridging loans

An unregulated bridging loan might sound risky, but it’s simply a way of classifying whether the loan is for residential or commercial use.

A regulated bridging loan is for personal residential properties only – those that you live in or plan to live in. They’re overseen by the Financial Conduct Authority (FCA), which gives you an added layer of protection if a loan is mis-sold or you receive bad advice about one.

An unregulated bridging loan is used for business purposes or property investments. They need to be unregulated due to their complex nature. This allows for greater flexibility, with each loan being tailored to specific needs.

Bridge loans for high-risk commercial properties

Certain loan lenders may have restrictions on the type of commercial property they’re willing to provide finance for, such as petrol stations, hotels and restaurants, which are considered higher risk.

Some lenders still offer bridge loans on high-risk properties, but charge larger interest rates and fees while having more stringent checks to assess viability.

Types of bridging loans to consider

The two main types of bridging loans are ‘closed’ and ‘open’. Below is a summary of these options and their differences, plus other considerations for choosing which is most suitable for your business.

Closed bridging loans

A closed bridging loan has a fixed end date. This includes a clear repayment schedule, so you know when you must have the funds required to pay off the loan, such as sale dates or when other accounts payable are due. This is usually agreed for a period of a few weeks or months.

Open bridging loan

With open bridging loans, there's no specific end date set. This accounts for circumstances where the borrower has yet to confirm their exit strategy, or if they’re awaiting a sale completion date or mortgage approval. However, lenders will still expect the loan to be repaid within a year or less. 

Due to the extra flexibility offered in this type of loan, it usually comes with slightly higher costs than a closed bridging loan.

First-charge and second-charge loans in bridging finance for property

Something else to be aware of is the difference between a ‘first-charge’ and a ‘second-charge’ loan in bridging finance. Basically, this is a categorisation for prioritising debt. So, if you were unable to repay the loan, these ‘charges’ are used to determine the priority of debts you owe.

If you don’t have any other loans secured against the property, you’d qualify for a first-charge bridging loan. If you already have a loan or mortgage on the property, you’d need to take out a second-charge bridging loan. 

You’re more likely to get a higher LTV rate on a first-charge loan, as there’s no other claim on the property. With a second-charge loan, lenders calculate the LTV based on the amount of equity you have in the property once the other debts/mortgages are deducted.  

Permission is usually needed from the first-charge lender before a second-charge lender can be added. The number of charges that can be placed on a property is theoretically unlimited, but the more it has, the less willing lenders are to consider it for security.

Benefits and advantages of using a bridging loan

So, what are the pros and cons of using a bridging loan? It’s important to consider how they may benefit your business and the potential downsides of this form of finance.

Bridging loan benefits

• A decision is usually given within around 24 hours of receiving your application, meaning it’s a fast source of capital.
• You can borrow large sums of money, especially if used for funding property purchases – the greater the value of assets used as security, the more you’ll likely be able to borrow.
• Flexible repayment options to help your cash flow situation.
• It can help you purchase properties that traditional mortgage lenders may avoid financing.

Bridging loan drawbacks

• As the loan will be secured against your property, you can lose it if you don’t keep up with repayments.
• Having flexibility and fast payment comes at a price, such as higher interest rates.
• You’re subject to other fees, such as:
  
  • Arrangement fees – charges for setting up the loan, typically 1–2%.
  • Exit fees – if your lender allows you to settle the loan earlier, you’ll usually have to pay about 1% of the loan amount to do so.
  • Administration or repayment fees – covering admin/paperwork costs.
  • Valuation fees – charges for the cost of surveyors to carry out a property/asset valuation.
  • Legal fees – covering lenders’ solicitor/legal fees.

Commercial bridging loan alternatives

While it’s clear bridging loans serve a specific purpose and offer several benefits, there are downsides, such as the various costs involved. So, it’s worth considering what alternative finance solutions can support your funding needs. 

Here are some of the main commercial bridging loan alternatives to consider:

Development loans

This is similar to a bridge loan in that it’s a short-term funding option, typically spanning 6–18 months. However, development loans are primarily designed to help fund residential development projects.

The first part of the loan is used to purchase the land, while the second part is for building costs. The second part is usually drawn in stages (often once a month), rather than being given at the outset. This drawdown phase is usually overseen by an Independent Monitoring Surveyor (IMS) who tracks the progress of the build and reports back to the lender on whether the project is on time and on budget.  

Remortgaging

If you already have a commercial mortgage on a property, there’s the potential to remortgage to give you access to cash funds. You can do this by taking out a new mortgage with your current lender or by switching lenders. The amount you can borrow will largely be determined by the amount of equity you have in the property.

Small business loans

A small business loan can be secured or unsecured, but if you’re looking for short-term funding, then an unsecured business loan might suit your needs better, especially if you don’t want to use your assets as security. 

Iwoca is a leading UK finance provider offering flexible business loans for SMEs. You can borrow up to £1 million for a few days, weeks or months, and we tailor terms to meet your business needs. 

Our Flexi-Loans don’t require assets as security, and you only pay interest on the amount you draw down and use. Plus, we don’t charge for early loan repayment. They are a great alternative to commercial bridging loans, especially as our online application process is quick and easy, without heaps of paperwork. You can expect a decision within 24 hours, and successful applications can access funds in a few hours.

Learn more about how to apply for a business loan with iwoca and check out our business loan calculator.