Bridging finance is a great way to “bridge the cashflow gap” between starting a project and realising its underlying value after completion.

Using a bridging loan will often give you an upfront capital boost, with the cost of that capital coming after the profit on the project has been realised. However, both that capital boost and the cashflow quick win comes at a cost.

This cost can vary depending on several factors including the certainty of an exit date, the amount of security available from the borrower and the loan to value ratio.

In this guide Seek Finance discusses the most frequently asked questions revolving around the cost of bridging finance.

How much can I borrow?

Bridging finance is designed to help finance commercial projects, therefore the amount you can borrow is determined on a case-by-case basis. The amount you borrow is based on the scope of your project and not your monthly income like a normal loan. We have extensive bridging finance facilities that can provide bridging loans from £26,000 to £50 million or more.

Are there any upfront fees?

We do not charge any upfront fees for bridging loans. Lenders may charge upfront fees depending on the level of work required to value your project. For example, in the absence of a suitable valuation report for your unique project, a lender may ask you to cover their valuation fees in advance and in some circumstances you may also need to cover the lenders legal fees.

What costs are involved with bridging?

For bridging loans there is usually an arrangement fee which is only payable once you have your bridging finance facility. Therefore, if you do not receive your bridging loan there are no arrangement fees to pay.

Can I get additional funds after I have completed my bridging loan?

This will be possible provided that the existing bridging loan facility is not in default and that there is sufficient equity available to secure the additional borrowing.

How is bridging loan interest calculated?

Lenders have different ways of calculating interest. We generally work with lenders where you have the option of rolling up the interest on the loan. This provides several benefits, including reducing the need for a monthly servicing charge and can be extremely attractive for cash flow purposes. Instead of paying interest monthly the interest is added to the loan balance every month and payable upon completion of the loan. Therefore, when you pay off the loan, the redemption repayment will include accrued interest and you will simply pay for the number of months you used the facility.

Can you make capital reductions to a bridging loan?

Yes you can, this will reduce your outstanding bridging finance balance and also reduce your monthly interest charges. You will need to weight up the benefits of paying a lower interest amount on your loan against the opposing cashflow benefits of not doing so.

Can I pay the bridging loan off early?

With the providers we work with, there are no penalties for paying of a bridging facility early provided you meet the minimum term requirement. Most loans are set up typically for 12 months with a minimum loan term of 1 month. This means that if you pay off your loan after 4 months you will only pay for the loan plus interest for 4 months.

What does retained interest mean?

With retained interest calculations, a lender will calculate the estimated interest charges for the term of the loan, add this to the loan advance and then retain the funds to service the interest payments every month until the loan is repaid or the term comes to an end.

What does rolled interest mean?

Rolled interest is when a lender agrees that the repayment of capital and interest can be deferred for a period, usually until the end of the loan term. In this period, you won’t make any repayments at all. Interest will continue to be added to the loan monthly, weekly or possibly daily. In this situation you should make sure you understand the impact of compound interest, namely you will be paying interest on the interest each time a new interest amount is added.

What does serviced interest mean?

This means that the interest charged on a loan is being repaid monthly rather than being added to the loan. Given the nature of this type of arrangement, lenders will normally want to see evidence that the borrower can afford to make the repayments every month in much the same way as a traditional mortgage.