Bridging loans for business: how they work and when they make sense

Property deals often don't line up neatly. An auction wants the money in weeks. The building you want comes up before yours has sold. A property needs work before a mortgage lender will touch it. A bridging loan fills that gap: it's money lent against property for a short time, repaid in one go when the longer-term money arrives.

This guide explains how bridging works, what it costs, and how to tell a sensible bridge from a risky one.

What a bridging loan is

A bridging loan is a short-term loan secured on property or land. Terms usually run from a few months up to 12 or 18, and some lenders go to 24. You don't normally make capital repayments along the way. Instead, the whole loan is repaid at the end, from a sale or a new loan.

Three things set it apart from a mortgage:

• Speed. Bridging lenders are set up to move quickly. With a clean legal title and a prompt valuation, some deals complete in a couple of weeks, though many take longer.
• Flexibility. Lenders will finance property that a mortgage lender won't, such as a building in poor repair or one without tenants.
• Cost. Interest is usually quoted as a monthly rate, and there are fees on top. Over a full year it costs considerably more than a mortgage, which is why it's meant to be short.

When businesses use bridging

• Buying at auction. Auction buyers usually exchange contracts on the day and must complete within a fixed period, often 28 days. A mortgage rarely moves that fast. A bridge pays for the purchase, and a mortgage replaces it later.
• Buying before you sell. A business moving premises might find the right building before the old one has sold. A bridge lets it buy now and repay when the sale goes through.
• Breaking a chain. If your purchase depends on a sale that's stalled, a bridge can let you complete on time instead of losing the deal.
• Refurbishment. A run-down building may not qualify for a mortgage until it's been put right. A bridge funds the purchase and, with some lenders, part of the works. Once the building is improved or let, it can be sold or refinanced. Bigger projects, such as conversions or new builds, usually move into development finance, a related product released in stages as the work progresses.
• Unlocking a deal quickly. Some businesses use a bridge against property they already own to raise money fast for a time-limited opportunity, with a clear plan to repay.

The exit: what lenders care about most

The exit strategy is how you'll repay the bridge at the end. It's the first thing a lender asks about, and the thing it scrutinises hardest. A lender can be relaxed about a building's condition or a thin trading history if the exit is convincing. It won't lend on a weak one, however good the property.

There are two main exits:

• Sale. You sell the property you bought, or another one you own, and the proceeds repay the bridge. The lender will want evidence that the price is realistic, such as an agent's appraisal, and that the timescale fits the term.
• Refinance. You replace the bridge with a longer-term loan, usually a commercial mortgage. The lender will want to see that you're likely to qualify: affordable repayments, a realistic valuation once the work is done, and the deposit or equity a mortgage lender will expect.

A good exit has a margin for things going wrong. Sales fall through, works overrun and valuations come in low. Ask yourself what happens if the exit takes three months longer than planned, and what it would cost.

Open and closed bridges

• A closed bridge has a fixed repayment date, because the exit is already in place. You might have exchanged contracts on a sale, for example, with a completion date set. Lenders see it as lower risk, so it can be cheaper.
• An open bridge has no fixed repayment date, only a maximum term. You expect to repay within that term but don't yet have the exit tied down. It suits refurbishments and sales not yet agreed, but lenders will look harder at the exit.

How the interest is paid

Bridging interest can be handled in three ways, and the choice changes both what you pay each month and how much you actually receive.

With rolled-up interest, check whether the lender charges interest on interest already added. That makes a noticeable difference over a longer term. With retained interest, ask what happens if you repay early: some lenders refund unused interest, some don't.

Watch the difference between the gross loan (the full amount you owe, including any fees and interest added in) and the net loan (the money you actually receive). A lender's maximum loan-to-value is often measured on the gross figure, so you get less in your hand than the headline suggests.

First and second charge

A bridge is secured by a charge on the property, which gives the lender the right to sell it if the loan isn't repaid.

• A first charge means the lender is repaid first from any sale. It's the usual position when you're buying a property with the bridge, or when the property has no mortgage.
• A second charge ranks behind an existing mortgage. The first lender usually needs to agree. Because the bridging lender is paid only after the first lender, second-charge bridges tend to cost more and lend less.

Many lenders will also take a charge over a second property to support the loan, and directors will normally be asked for a personal guarantee.

What a bridging loan costs

Interest is only part of the bill. A full picture includes:

• Interest, quoted monthly. Lower-risk deals, with a strong exit and a modest loan-to-value, get better rates.
• Arrangement fee, often around 1% to 2% of the loan, usually added to the loan.
• Exit fee. Some lenders charge one when you repay, often a percentage of the loan; many don't. Check before you choose, because it can make a cheaper-looking rate dearer.
• Valuation fee, paid upfront, whether or not the loan completes.
• Legal fees, for your solicitor and the lender's.
• Broker fee, if your broker charges one.
• Default charges. If you overrun the term or miss a payment, the interest rate can jump sharply and extension fees may apply. This is the biggest risk in bridging.

Compare offers on the total cost in pounds for the period you expect to borrow, with a second figure for a few months' delay. Our guide to what a business loan really costs explains how to compare fees and rates.

A worked example. A company buys a vacant commercial unit at auction for £300,000 and must complete within 28 days. A bridging lender lends 70% of the value, £210,000, over a 12-month term with interest rolled up. For illustration, at 1% a month on a simple basis, that's £2,100 a month: £18,900 over nine months. Add a 2% arrangement fee of £4,200, plus valuation and legal fees. The company pays the £90,000 balance and stamp duty from its own cash, spends six months fitting out the unit and letting it, then refinances onto a commercial mortgage that repays the bridge. If the refinance takes three months longer, the interest adds another £6,300, more if the term runs out and default interest applies. These are round numbers to show the mechanics, not a quote.

Regulated or unregulated?

Most business bridging is unregulated. Loans to limited companies, and loans secured on commercial property or on residential property let to tenants, generally fall outside FCA mortgage rules.

A bridge can be regulated by the FCA when it's secured on a home that the borrower, or a close family member, lives in or will live in. Regulation brings extra protections, but fewer lenders offer it. Whether a particular loan is regulated depends on who borrows, what the property is used for and what the money is for. The lender or broker will tell you which applies.

If your own home is part of the security, for any type of bridge, take independent legal advice first. If the exit fails, the lender can sell it.

Common mistakes to avoid

• A hopeful exit. "We'll sell it" isn't a plan. Have evidence of the price and a timescale with spare months in it.
• Comparing monthly rates only. Arrangement fees, exit fees and how interest is charged can change the total a lot.
• Borrowing for the shortest possible term. If the exit slips past the end, default interest can be severe. A slightly longer term often costs less than an extension.
• Using a bridge for a cash-flow problem. Bridging is for property transactions with a clear exit, not for covering day-to-day losses.
• Forgetting the refinance test. If your exit is a mortgage, check early that you'll meet a mortgage lender's deposit and affordability rules.

Questions people ask

How quickly can I get a bridging loan?

Some bridges complete within a couple of weeks, especially with a clean legal title and a prompt valuation. More complex cases take longer. Having your exit evidence and documents ready is the best way to speed things up.

How much can I borrow with a bridging loan?

That depends on the property's value, the charge and the lender. Many lenders cap first-charge bridges at around 70% to 75% of the value, often measured on the gross loan. Second-charge bridges usually lend less.

What is an exit strategy?

It's how you'll repay the bridge at the end of the term, usually by selling a property or refinancing onto a longer-term loan. Lenders judge it more closely than anything else. A strong exit has evidence behind it and spare time for delays.

What happens if I can't repay a bridging loan on time?

Usually, the lender charges default interest, which is higher than the normal rate, and may agree an extension for a fee. If there's no realistic way to repay, it can enforce its charge and sell the property. Talk to the lender early if your exit is slipping.

Are bridging loans regulated?

Most business bridging loans aren't. A bridge secured on a home that the borrower or a close family member lives in, or will live in, can be regulated by the FCA. Loans to limited companies against commercial or let property are generally unregulated.