A bridging loan is a way to access short-term finance to pay for something while you’re waiting for money that’s owed to you. You can use a bridging loan for property investments, a new business venture, or even for paying your tax bill.
This guide explains how bridging loans work, potential risks, costs involved, and questions to ask yourself before borrowing any money.
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Bridging loan explained – a guide for small businesses and landlords
A bridging loan (sometimes called a bridge loan) is a flexible way to access funds for a short period of time – literally to ‘bridge the gap’ between money coming in and money you need immediately.
So, how does a bridging loan work?
Bridging loans can be used to access large sums of money quickly, from £5,000 to £20 million, and more. These are the two types of bridging loan you can apply for:
- open bridging loans – when there’s no fixed repayment date
- closed bridging loans – when you have a fixed repayment date
When it comes to applying for a bridging loan, the process looks a bit like this:
- Make an application online
- The lender runs a credit check
- The lender accepts or rejects your application (this is usually within 24 hours)
- Valuation and lender checks take place
- Funds reach your account (this can usually be within two weeks)
Bridging loan example
You could use a residential bridging loan for a house purchase if, for example, you’re selling one property but need a deposit for a new buy-to-let property before that sale completes. A bridging loan can be useful once contracts have been exchanged to secure the finance you need, as you’ll know how long you’ll need to borrow the money for.
A bridging loan may also be useful when buying property at auction, because funds have to be available quickly.
How much does a bridging loan cost?
As with any loan, you can choose between fixed or variable interest rates. The difference here however is that, unlike other longer-term loans, bridging loan rates are priced on a monthly basis.
Since people will typically take these loans out for shorter periods, the interest rates can be extremely high – anything from 0.48 to 2 per cent interest a month.
It’s not only the bridging loan interest rate you have to think about either. Bridging loans come with a number of other expenses and fees depending on your lender, such as:
- arrangement or facility fees (this can be around 2 per cent)
- legal fees
- valuation fees
- bank transfer fees
- broker’s fees
- exit fees (can be a 1 per cent charge at the end of the loan period)
Is a bridging loan right for you?
It’s important to consider the risks and discuss your finance options with a professional. Here are just some of the questions you should ask when researching what’s out there:
- how much is the interest rate?
- how much do you need to borrow?
- when will you be able to pay it off?
- can you afford the additional costs and fees?
- is the bridging loan regulated? (some lenders aren’t regulated by the Financial Conduct Authority)
- how is the loan secured? (it’ll be against a high-value asset such as property of land)
Pros | Cons |
|---|---|
Fast access to cash | Interest rates are very high |
Ability to borrow a large sum of money | Additional fees make borrowing expensive |
Loans can be flexible to your needs | Loans are secured against a high-value asset, so you need to be sure you can repay on time or risk losing it |
It’s worth remembering that bridging loans are an expensive way to borrow money and are only intended as a short-term cash injection. If you need a longer term loan, you might be better off looking into other business loans or invoice finance.
If you’re a landlord, you could consider remortgaging your buy-to-let property.
Business finance is a complex topic. Please treat this article as a guide and you should always seek professional advice and research the risks before taking out a loan.
Do you have any unanswered questions about bridging loans? Let us know in the comments below.
Photograph 1: Natee Meepian/stock.adobe.com
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