What is a bridging loan?
2-minute read
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:
- 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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Written by
Catriona Smith
Catriona Smith is a content and marketing professional with 12 years’ experience across the financial services, higher education, and insurance sectors. She’s also a trained NCTJ Gold Standard journalist. As a Senior Copywriter at Simply Business, Catriona has in-depth knowledge of small business concerns and specialises in tax, marketing, and business operations. Catriona lives in the seaside city of Brighton where she’s also a freelance yoga teacher.
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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