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The essence of the product is that short-term finance is required to solve a problem quickly. The bridging loan provider will normally lend up to 75% of a property value either on a present day market value basis or against a 90- or 180-day value which is often much less than the open market value.
The following are examples of how flexible a bridging loan can be:
1. Raising capital
One of the most common uses of bridging finance is raising capital for immediate needs such as VAT, PAYE, taxation or stock purchase opportunities, where terms differ from normal creditor terms.
Acquiring property under value is an ideal opportunity to raise finance, as banks, building societies, etc will only lend against purchase price or valuation, whichever is lower.
Consequently, accruing a property for say £75,000 against a valuation of £100,000 plus is a perfect way to use bridging finance, as long as an exit route is in place quickly to refinance the loan onto longer term traditional finance.
2. Site acquisition pending planning or development
Property companies usually have to act quickly to buy development sites with or without planning consent. If planning consent is required, then a bridging loan might be required for a number of months pending the planning decision.
3. Development finance
Bridging finance can be used to build out a property development. The most important aspect is to make sure the cost of bridging finance is carefully factored into the development costs, as any delays in completing the scheme could seriously reduce the projected profit.
4. Corporate recovery
Where a business has gone into receivership and has property assets, there is often a need to act quickly to acquire the assets. Usually, property is being acquired under value and therefore bridging finance becomes the perfect method of financing the purchase.
5. Tax liabilities
When a tax demand is received, usually for a larger amount than existing cashflow can support, the funds can be raised against the business property or other properties to ensure the payment deadline is met.
6. Individual Voluntary Arrangements (IVA) / bankruptcy annulment
A business may need short-term funding to meet creditor obligations, payments, or to overcome financial difficulties such as bankruptcies and IVAs.
A bridging loan can be the solution and may be secured by either a 1st or 2nd legal charge over a suitable property. A 1st legal charge can be taken to annul IVAs or impending bankruptcy.
7. Management buy-in / Management buy-out Bridging finance is ideal in a management buy-in / buy-out opportunity, as there is quite often a very short time scale to complete these transactions.
8. Inheritance tax payments
A common problem is when a family is left with property, and inheritance tax applies to the transaction prior to the granting of probate.
Rather than selling the property when the market is not attractive or opting for a quick sale just to settle the inheritance tax bill, bridging finance can be used to settle the bill and allow the property to be disposed of at a more appropriate time when there will be additional equity uplift.
Typical bridging loan costs:
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Interest rate |
from 1.50% per month to 2.50% per month |
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Arrangement fee |
1% of loan |
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Exit fee |
up to maximum 1% |
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Minimum/maximum term |
1-6 months |
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Loan value |
up to 75% of property value but can be 100% with additional security. |
Bridging Finance is an important finance product and there are many ways in which it can be used. It is very important that when considering Bridging Finance the borrower has an exit strategy in place to mitigate the costs of such finance.
About the author
CFS is an expert in business finance and we ensure our clients always have an exit strategy in place.
Please contact David Chesters at CFS on 07966 926 283 to discuss further.
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