Guide to Commercial Bridging Finance
Bridging Finance Explained
Commercial bridging finance is a loan, or short-term mortgage, usually for a period of 12 months or less, which may be used towards the purchase of a property, to consolidate debts or to resolve a temporary cash flow situation within a commercially operated business. The loan or short-term commercial mortgage is secured against existing property.
Examples of the Uses for Bridging Finance
As a typical example of the circumstances in which bridging finance is often used, the following situation could arise: A borrower may be looking to relocate to new premises, but, because it would be harmful if the commercial operation were halted for any length of time, the new premises would need to be in place prior to selling the old premises. Bridging finance, secured against the current property, could be raised to secure the deposit on the new location and thereby allow the purchasing process on the new property to continue to a conclusion. The lender would then have an agreed period of time in which to repay the bridging finance, usually after completing sale of the original premises.
Another example of a circumstance when bridging finance may be required, could arise as follows: A sole trader is wanting to make a purchase of essential machinery in order to keep the business competitive. Although the trader can prove full order books and outstanding unpaid invoices, which would more than cover the cost of the new machinery, the invoices are not due for repayment for several months. However, it is vital that the machinery is installed immediately or the trader could face unfair competition from rivals. In this case, the trader may apply for short-term bridging finance, paying the monthly interest until the invoices have been realised and the funds are available to repay the principle sum loaned.
Bridging Loans can also be used for the following purposes:
For financing property development, which may include the purchase of the site: Bridging loans enable the developer to purchase additional property or land without the need to resort to selling existing property or assets. In cases where property is bought and then immediately sold on again at a profit, the only additional outlay would be the interest paid on the short-term bridging finance.
For financing self-build projects: It can take several years to complete a commercial self-build build project. With suitably structured bridging finance, money can be released at intervals as when it is needed. For example, the funding could be used to purchase materials or cover the cost of additional labour charges. If the object is then to sell the building once it has been completed, the only additional outlay would have been the interest paid on the structured bridging finance.
For the avoidance of bankruptcy or financial collapse: Bridging finance can be used to pay essential costs, whilst release of some of the equity in the business is being arranged. Or bridging finance could also be used to make essential repairs to a business property in order to make it viable as a selling proposition.
How is Bridging Finance Applied?
Because the bridging loan is usually short-term, only the interest is repaid each month. Provided the interest repayments are made over the stipulated period agreed when taking up the bridging loan, he principle can then be repaid to the lender when the existing property is sold, or when the favourable circumstances cited by the borrower when procuring the loan come to fruition.
One advantage of bridging finance for some borrowers is that, because the loan will be interest only, and secured against existing property, lenders will tend to use more discretion when considering applications from borrowers with a poor or bad credit history. In cases where there may be a justifiable delay in completing the sale of the property put up as security, and the agreed term of the bridging finance expires, lenders can transform the loan to a standard commercial mortgage, usually applying the Standard Variable Rate of interest, without applying any penalty. However, the borrower should be reasonably certain that any potential purchase or sale has a very sound chance of succeeding within the prescribed length of time agreed, or that a remortgage package or projected increase in cash flow will actualise within the term predicted. The penalties for defaulting on payments remain the same as for a standard commercial mortgage, and there would be a possibility of foreclosure on the commercial property put up as security in the event of non-payment of the debt under the agreed terms. BusinessMortgages.co.uk will of course point out any risks to potential lenders, and guide its customers in the best way of dealing with any difficulties, which may arise during ongoing negotiations for bridging finance.
Interest Rates
As the lending on commercial bridging finance is usually only for a very short term, the interest rates are likely to be higher than for a standard commercial mortgage as the lender will want to ensure a satisfactory profit over the shorter period involved. Generally, finance will be offered at the Standard Variable Rate (SVR). This rate of interest is calculated in line with the Bank of England Base Rate (BOEBR), currently at around 5.75%, or the London Inter Bank Offer Rate (LIBOR), and then adding the amount of additional profit to be realised by the lender. Obviously this varies from lender to lender, and is influenced by many factors, including any risk factors involved.
In some circumstances, a Capped Interest Rate loan may be offered. This rate of loan will have a fixed maximum amount of interest for a pre-determined length of time, and it will not go beyond this rate, even if the Standard Variable Rate becomes much higher. However, if the loan agreement is still active at the end of this agreed term, the loan will again revert to the SVR, with the additional lender profit also built in.
Contacting Bridging Finance Lenders
Because of its specialised knowledge and expertise in the commercial finance sector, BusinessMortgages.co.uk has close contact with all approved commercial bridging finance lenders. This is because bridging finance is usually available from lenders who also specialise in commercial mortgages, and often the lender providing the business loan on the new property to be acquired, will also be providing the bridging finance. This greatly simplifies the application for bridging finance by reducing the paperwork involved, as the lender will already have made the necessary automatic checks and will have detailed knowledge on the nature of the application.
Documentation Required by Lenders
If the bridging finance is being supplied by the same lender who is also dealing with the main commercial mortgage or loan, then most of the documentation required will already have been supplied, and the process will be much simplified.
In the event of a different lender being sourced, there is likely to be a requirement for the following documentation:
For existing business
- Audited financial statements, which may include a profit and loss statement (P&L), covering the last three years of business
- Business tax returns, also covering the last three years
- A certification of accountancy, confirming that the business is operating correctly
- Any personal tax returns by those liable for the company
For new or start-up businesses
Because of the higher risk involved with new or start-up organisations, which have no credit history, there are likely to be more rigorous checks regarding the potential borrowers’ previous personal financial background. Almost certainly, lenders will want to see a well-structured business plan, detailing targets and a development plan for the company, expected profitability and the amount of finance required over a specified amount of time. The more detailed and considered the plan, the more likely the lender will be favourable towards the application. The business plan can also provide a useful aid in sourcing other possible forms of finance, such as a UK Small Business Government Loan or a UK Small Business Grant.
Additional Costs
When making an application for bridging finance for any purpose, borrowers should be aware of the likelihood of incurring some extra costs in order to facilitate all the processes involved. Some of the prime examples of possible additional fees and costs are detailed below:
Arrangement Fee
This is a fee charged by any third party or broker who may be used, for initiating the bridging finance. This fee is usually paid out of the loan proceeds at the end of the transaction, Some brokers may receive the fees from the lender, or may charge the borrower directly. BusinessMortgages.co.uk will advise its customers on how to keep these charges down to the absolute minimum.
Completion Fee
This is a fee which my be charged by the lender on completion of the bridging finance process. Usuaully it will be calculated as a small percentage of the bridging finance, and covers any additional administrative costs which may not have been charged directly to the loan account.
Deposit of Good Faith
This is a deposit, which will be returnable should the borrower take up any loan offer. It is charged to compensate for any costs, which may have already been incurred, and is used to compensate the lender should the applicant decide not to take up the offer after processing of the loan has already begun.
Surveyors Fee
A fee paid to the company hired to survey the property to be covered by the bridging finance.
Legal Expenses
As with a standard commercial mortgage, bridging finance must be processed with all the usual legal requirements. These costs will be paid to cover the cost of the lender’s solicitors fees. And, of course, for any solicitor services used by the borrower.
In Conclusion
Our Business is to Support your Business.
BusinessMortgages.co.uk exists to support and encourage all businesses, both large and small, to develop and grow to their maximum potential. Utilising its specialist financial knowledge and commercial expertise, and the most efficient and rapid electronic search technology, BusinessMortgages.co.uk sources the entire UK commercial financial market to negotiate the best possible terms and interest rates available. The process is so simple and straightforward that form filling and waiting for a decision are reduced to an absolute minimum, allowing the customer to concentrate wholly on the development of their own business.
With so many attractive commercial finance options currently accessible, including business loans and commercial loans, commercial mortgages and commercial loans, standard bridging loans and commercial bridging loans, BusinessMortgages.co.uk is able to offer a unique financial solution, tailored exactly to the unique requirements of each valued customer.