Bridging finance is becoming increasingly popular as a source of finance in the United Kingdom for businesses and the like who are hoping to raise finance.
Around £750 million was borrowed via bridging in 2011. Since then, the amount has increased to £4 billion in 2016 – a fivefold increase on 2011
This growth has happened quickly has a direct result of stricter criteria set out by mainstream banks and the emergence of 40 bridging lender who have established a competitive environment in the UK market.
What is Bridging Finance?
Bridging finance is a type of short-term finance which is used where there is a strict deadline present. True to the name, you are essentially bridging the gap of finance in order to complete a given deal. You apply for a bridging loan when other sources of finance are unavailable or may take too long to obtain.
You can typically borrow an amount which ranges from £25,000 to as much as £25 million. However, because of the nature of bridging loans being short term, the loan term is usually only around 3 months to 12 months – in some cases it may be stretched to 24 months, however. (Source: MT Finance)
It is required that the applicant puts down some form of security measure as part of the agreement between applicant and lender. This security measure is usually something like a commercial or residential property or even a stake in your business. Other measures of security that could be used include pieces of artwork, cars or other vehicles or jewellery, however are far less common.
It is expected of you to pay the loan and interest off in its entirety, otherwise you have risk your property being repossessed. If you are a borrower, you have the option to repay a loan off in monthly installments, interest-only or rolling up the interest until the end of the loan term.
The interest rates which are charged by lenders ranges from around 0.59% to 2% a month. On top of this there will be additional fees, for example, a 2% broker fee.
When might you use a bridging loan?
Property Development is the most common reason for taking out such a loan. If a property developer is wanting to do up a house to sell for a higher price, they will obviously need money to do so. Rather than going down the traditional route by applying for a mortgage which could take several weeks, a bridging loan offers a quicker route.
Stock or investment opportunities which are in need of cash may be a reason to take out a bridging finance loan to maximise your returns.
A growing company may need a new office. However, the individual or individuals behind the company may not have the financial means to obtain or upgrade their professional premises. Through bridging finance, he or she will be able to purchase a bigger and better office space and also use the premises as the security. 12 months on when the company has made profit, this loan can be repaid.