Bridging finance is an increasingly popular form of alternative finance which allows companies to raise money or purchase something within a tight deadline and repay within 3 to 24 months.
As a non-banking alternative, you can apply directly with a private individual or company and often get access to the funds in a matter of weeks, rather than months with a traditional bank.
Bridging and other types of specialist finance gained traction during the financial crisis of 2008 where banks became increasingly strict with whom they lent to – and today it has grown into a large industry, now worth around £7 billion, an increase from £1 billion in 2011.
When might a company use bridging finance?
A company will use bridging finance to raise money within a strict completion date, hence it is often used for property developers looking to buy a property under a tight deadline. Rather than go through the long application and hurdles of a typical mortgage, companies can raise money to buy a residential or commercial property usually within 2 to 4 weeks – with sums ranging from £50,000 to £25 million.
To raise capital, companies can use bridging finance provided that they have valuable collateral or assets. It is sometimes used for businesses who are trying to grow or invest in their own business, using things like their office premises, vehicles or equipment as collateral.
In aviation, Thomas Cook’s Condor used a bridging loan of €380 million in 2019 secured against their airlines and TUI received bridging finance worth €1.8 billion in 2020. The nature of the loan was certainly short-term and used valuable collateral to get approval.
What are the terms?
Bridging finance is almost always secured against some form of collateral, which is usually a property. A typical loan term is 3 to 24 months and if you cannot keep up with repayments, you may find that your property or asset is repossessed.
Since some building projects or business deals are long-winded, it is common for a bridging loan to come to an end and for the applicant to refinance under different terms upon completion.
Monthly interest is charged on a bridging loan, with the option to roll up all the repayments until the end of the loan term. By this point, you expect the borrower to have exited on the project or seen a huge influx in revenue to help pay off their loan. If it is a property, it may have been renovated and sold on the open market, or perhaps it is refinanced so the individual can rent it out to tenants.
Other terms include:
∙ A broker fee of 1%
∙ Interest rates from 0.44% per month
∙ Early exit fees apply
∙ Additional costs may include legal, valuation and surveyor fees
Is bridging regulated?
Yes, bridging finance is regulated by the Financial Conduct Authority and there are many rules in place to ensure that an individual does not borrow against their primary residence and could be at risk of losing their home.
Even if you apply through a bridging loan broker such as Lending Expert, you should be offered the lowest rate possible according to your deal and circumstances.