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What is a bridging loan?

3-minute read

What is a bridging loan?
Catriona Smith

Catriona Smith

24 September 2021

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.

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:

  1. Make an application online
  2. The lender runs a credit check
  3. The lender accepts or rejects your application (this is usually within 24 hours)
  4. Valuation and lender checks take place
  5. 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.

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)
ProsCons
Fast access to cashInterest rates are very high
Ability to borrow a large sum of moneyAdditional fees make borrowing expensive
Loans can be flexible to your needsLoans 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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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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