The Gaffer

Bridging

A bridging loan is a short-term secured loan designed to “bridge the gap” when you need funds but are waiting for cash from another source. These loans are commonly used in scenarios like buying a property before selling your current home or purchasing stock to sell in a forecourt’s.

  1. Purpose:
    • Used to “bridge the gap” between immediate capital needs and long-term financing.
    • Typically applied in real estate transactions or other business opportunities.
  2. Features:
    • Short-Term: Repayment period usually 12-24 months.
    • Secured: Secured by a legal charge on commercial or mixed-use property.
    • Flexible Use: Not limited to property purchases; can fund various business needs.
    • Also known as “swing loans,” “interim finance,” or “gap financing.”
  3. Eligibility:
    • Available to individuals, limited companies, LLPs, partnerships, and some pension schemes.

Keep in mind that they’re high-risk, as they’re secured against an existing property or asset – meaning you could lose your home if you can’t repay the loan.

Pros:

  1. Speed: Bridging loans offer rapid access to funds, crucial for time-sensitive opportunities like property purchases or business expansion.
  2. Flexibility: They can be used for various purposes, including property acquisition, renovations, working capital, or bridging gaps in cash flow.
  3. Short-Term Commitment: Repayment periods are typically 12-24 months, allowing businesses to address immediate needs without long-term obligations.
  4. Secured Financing: The loan is secured against commercial property, reducing risk for lenders.
  5. No Early Repayment Penalties: Some lenders allow early repayment without penalties.

Cons:

  1. Higher Interest Rates: Bridging loans often have higher interest rates than traditional mortgages due to their short-term nature.
  2. Risk of Default: If the borrower cannot repay, the lender may take possession of the secured property.
  3. Costs: Fees for arrangement, valuation, legal work, and exit can add up.
  4. Complexity: Bridging loans involve legal processes, valuations, and due diligence.
  5. Exit Strategy Required: Borrowers must have a clear plan to repay the loan (e.g., selling the property or refinancing).