Raising the capital required to fund any real estate project is never an easy task, especially so for smaller companies looking to enter the industry. As real estate projects take a considerable amount of planning, preparation, and effort to achieve success, it’s great to have the finance side covered quickly. For this reason, many businesses turn to commercial bridging loans, as they provide fast access to capital without taking much attention away from the project. In this article, we will be breaking down commercial bridging loans, and discussing what to consider before taking one.
What is a commercial bridging loan?
Commercial bridging loans are a specific type of bridging loan, which itself is a type of secured loan. While bridging loans can be used to fund a variety of projects and purchases, commercial bridging loans, unsurprisingly, focus on commercial needs specifically. Real estate projects are the most common application for this form of finance. This is because bridging loans, commercial or otherwise, aims to bridge the gap between a business’ current financial situation and a long-term solution. To do this, they emphasise speed and accessibility, qualities perfect for financing a real estate project.
Although bridging loans most often facilitate the purchase of property for commercial uses, they can be useful to private individuals too. If you are looking to finance a renovation for your house, or would like to snatch up a property without waiting for your old one to sell, bridging finance can be the tool for you. As a private individual, the loan will work much the same way as a commercial bridging loan, though your options may be slightly more limited compared to that of a business depending on your income.
How does a commercial bridging loan work?
Commercial bridging loans are somewhat different from more traditional forms of finance you might see offered by a bank. They fall under the umbrella of secured loans, and are overwhelmingly offered by private lenders. As we mentioned, they aim to assist businesses looking to purchase assets for commercial purposes, most often land or property.
Commercial bridging loans are a form of secured loan. This means that in order to take out a loan, you must put up a physical asset of similar value as security. When purchasing real estate, this will usually include an older property you might own, or the property you intend to purchase. Whether you use an older property as security, or the target property, it will have a significant effect on what loans will be available. A commercial bridging loan lender will not likely offer loans in excess of 80% of the asset placed as security. By using an asset of low value, you will be limiting yourself to loans of a similar value. The remaining 20% must be paid by you.
Because of the nature of commercial bridging loans, you can expect to pay comparatively high interest rates. Although your average bank loan is unlikely to exceed 10%, you can expect a commercial bridging loan to treat that percentage as a minimum. Similarly, there can be additional costs and fees that aren’t associated with the usual bank loan, appraisal fees or origination fees, for example. Of course, the extent of these costs and interest payments will vary from lender to lender, but a typical throughline rings true.
Points to consider before taking out a commercial bridging loan
As with anything, there are a few points to keep in mind when considering a commercial bridging loan. Even if they are a good fit for your situation, diving in without knowing the details is a good recipe for failure.
Early repayment options
The core function of commercial bridging loans is to offer businesses a means of rapid capital raising. With speed being a key tenet, you should be able to pay off your loan quickly, and benefit from doing so. One example is interest. Depending on the type of commercial bridging loan lender, they may offer a discount or savings if you pay off your loan early. Some lenders offer amortising loans, where early repayments mean you avoid interest. Alternatively, other lenders offer factor rate loans, where although you must pay a fixed interest rate, early repayment will earn you an overall discount. Be sure to check what the terms are for early repayments before you sign. You might save yourself some money.
Fast access to capital
Commercial bridging loans are all about speed. You can’t afford to let the perfect property slip by due to slow funding. When applying for a commercial bridging loan, you must ensure that the loan’s timeframe is in accordance with your own. If you need capital in three days, waiting a week will be useless. The more urgent your need for capital, the more legwork you will have to put in. A bank is not likely to lend to you at such short notice. A private lender specialising in fast access loans might.
The usual factors
Although the previous two points are crucial, they must be considered alongside the typical qualities you would be on the lookout for. Keep an eye out for factors such as the interest rate, loan duration and repayment terms, hidden costs or fees, and of course, the reputation of your chosen lender. The specifics of each quality will vary from lender to lender. You shouldn’t make assumptions if you don’t want to get stung.
Closing thoughts
Commercial bridging loans can be just what you need to seize the opportunity to purchase the perfect property. They offer an unmatched degree of flexibility, getting cash in your hand quickly. For real estate projects and purchases, this can be make-or-break. However, they are comparatively costly, and come with the risk of asset seizure if you miss repayments. Because of this, commercial bridging loans may not be suitable for smaller businesses with an especially tight cash flow or limited cash on hand. That being said, bridging finance as a whole is intended to be exactly that – a bridge. Provided a small business treats it as a short-term measure, and has the relevant long-term solutions lined up, the risks will be mitigated. With appropriate planning, any business can stand to benefit from commercial bridging loans. Pouncing on opportunities, rather than letting them escape.