Commercial bridging loans

A commercial bridging loan is a short-term loan secured on property, used to complete a purchase or meet a deadline before longer-term money is in place. Interest is charged monthly and can be rolled up, retained from the loan at the start, or paid each month. Every bridge needs an exit, a sale or a refinance that repays it, and the lender lends on the strength of that exit.

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What a commercial bridging loan is for

A bridging loan fills a gap of months between needing money and having it. A business buys a building at auction and must complete before a commercial mortgage can be arranged. An investor buys a vacant unit that mortgage lenders will not lend on until it is refurbished and let, then refinances onto a commercial mortgage. A company buys new premises before the sale of its old ones completes. A business has an acquisition to complete and a property sale that will pay for it a few months later.

Commercial bridging covers loans secured on commercial property, land, mixed-use buildings and investment property let to others. A bridging loan to an individual secured on a home that the borrower or a close family member lives in is a regulated mortgage contract and is outside the funding search.

Bridging is priced by the month. On top of the monthly interest there is an arrangement fee, the lender’s valuation and legal costs, which the borrower pays, and sometimes an exit fee when the loan is repaid. The loan can be secured by a first charge, or by a second charge behind an existing mortgage if the first lender consents. The lender sets the maximum loan to value and the term, and the interest method decides how much cash you receive and how much you owe at the end.

Rolled-up, retained and serviced interest

	Rolled up	Retained	Serviced
When interest is paid	All at the end, with the loan	Deducted from the loan at the start	Each month
Monthly payments	None	None	Interest each month
Cash you receive	The full loan	The loan less the retained interest	The full loan
What you owe at the end	The loan plus all the interest, which compounds if the agreement says so	The loan; any interest not used is refunded if you repay early, where the agreement allows	The loan
Who it suits	A borrower with no income from the property until the exit	A borrower who wants no monthly payment and a fixed cost	A borrower with rent or trading income to pay the interest

A £500,000 bridge three ways

Illustrative example

A company borrows £500,000 for 12 months at an assumed interest rate of 0.9% a month, before fees. Rolled-up interest is assumed to compound monthly; retained interest is assumed to be 12 months at 0.9% on the £500,000.

Rolled up: cash received: £500,000.00
Rolled up: owed after 12 months: £556,754.84
Retained: interest deducted at the start: £54,000.00
Retained: cash received: £446,000.00
Retained: owed after 12 months: £500,000.00
Serviced: interest paid each month: £4,500.00
Serviced: owed after 12 months: £500,000.00
Interest over 12 months: rolled up, retained, serviced: £56,754.84, £54,000.00, £54,000.00

Compounding adds £2,754.84 to the rolled-up loan, and retention leaves the company with £54,000 less to spend on the day. The bridging loan calculator runs the same comparison on your own figures.

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What the lender looks at

A bridging lender looks first at the property and the exit. It instructs a valuer for the open market value and may also ask what the property would fetch in a restricted sale period, because that is what it would recover if it had to sell. It checks title, planning and any lease the property is subject to.

Then it tests the exit. For a refinance it wants to see that a term lender would lend enough, on the rent or the business’s earnings, to repay the bridge. For a sale it wants evidence of value and demand. It also looks at the borrower’s experience with this kind of project, and asks the directors of a borrowing company for a personal guarantee.

The property, its value and its title
A credible exit, with evidence
The borrower’s experience and other commitments
Who else holds a charge on the property

How a bridging loan runs

1
Terms
The lender issues terms on the property, the loan, the interest method and the exit. Read the default rate and the extension terms at this stage.
2
Valuation and legal work
The lender’s valuer inspects the property and both sides’ solicitors deal with title, searches and the charge. The borrower pays both.
3
Completion
The lender sends the funds to your solicitor, less any retained interest and fees, and registers its charge.
4
Exit
The sale or the refinance repays the loan with the interest and any exit fee, and the lender releases its charge.

Exit routes and when an exit fails

There are three main exits. A sale of the property, or of another asset, repays the bridge from the proceeds. A refinance onto a commercial mortgage, a buy-to-let loan for let residential investment, or development finance replaces the bridge with a longer loan. Money from the business or a separate transaction, such as the sale of a subsidiary, can also repay it. Set the bridge’s term longer than you expect the exit to take. Sales fall through and refinances get delayed by valuations, lettings and lender queries.

If the term ends and the loan is not repaid, the agreement puts the loan in default. The interest moves to the default rate set in the agreement, and fees build up. The lender may agree an extension, at a fee and on its own terms. If it does not, it can appoint a receiver to take control of the property and sell it. A sale arranged to repay a lender may fetch less than you would get with time to market it, and if the sale does not cover the debt, the lender pursues the shortfall from the borrower and any guarantor.

Before you sign, write down what you would do if the exit took six months longer than planned, and what that would cost at the default rate. If the property would have to be sold at that point, choose a longer term or a smaller loan.

Bridging loan cost calculator

The interest and fees on a bridging loan with interest rolled up, and what each extra month before the exit adds.

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Questions people ask

How does a commercial bridging loan work?

A lender advances money secured on property for a short term, with interest charged monthly. The loan is repaid in one sum at the end from a sale or a refinance, called the exit. Interest can be added to the loan, deducted at the start or paid monthly. The lender decides on the property’s value and the strength of the exit.

What is rolled-up interest on a bridging loan?

Rolled-up interest is added to the loan each month and paid at the end with the capital, so there are no monthly payments. If the agreement compounds it, interest is charged on earlier interest too. On £500,000 for 12 months at an assumed 0.9% a month, compounding brings the interest to £56,754.84 against £54,000 paid monthly.

What is a bridging loan exit strategy?

The exit is how the loan will be repaid at the end of its term: selling the property, refinancing onto a commercial mortgage or development finance, or using money from another sale. The lender tests it with evidence, such as a valuation, a term lender’s appetite or a sale agreement. Allow extra time for delays.

Can I use a bridging loan to buy at auction?

Yes. A winning bid is a binding contract with a completion date set by the auction’s conditions. Arrange the bridging terms and valuation before the sale so the money is ready on the completion date, and keep cash for the deposit you pay on the day.

What happens if I cannot repay a bridging loan?

The loan goes into default and the interest moves to the higher default rate in the agreement. The lender may extend the term for a fee. If it does not, it can appoint a receiver to sell the property and claim any shortfall from the borrower and guarantors. Talk to the lender before the term ends.

Is a bridging loan regulated?

A bridging loan to a company is not regulated. A bridging loan to an individual or trustees secured on property of which at least 40% is the home of the borrower or a close family member is a regulated mortgage contract, which needs a regulated adviser and is outside the funding search.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

All business funding

Commercial bridging loans

What a commercial bridging loan is for

Rolled-up, retained and serviced interest

A £500,000 bridge three ways

What the lender looks at

How a bridging loan runs

Terms

Valuation and legal work

Completion

Exit

Exit routes and when an exit fails

Bridging loan cost calculator

Questions people ask

Assets and property

Commercial mortgages

Development finance

Should my business buy or rent its premises?

Secured business loans

Commercial bridging loans

What a commercial bridging loan is for

Rolled-up, retained and serviced interest

A £500,000 bridge three ways

What the lender looks at

How a bridging loan runs

Terms

Valuation and legal work

Completion

Exit

Exit routes and when an exit fails

Bridging loan cost calculator

Questions people ask

Assets and property

Commercial mortgages

Development finance

Should my business buy or rent its premises?

Secured business loans

Start a funding search

Cover for a personal guarantee