Commercial Bridging Loans: A Guide to Bridging Loans for Buying Commercial Property

– Introduction
– Commercial Bridging Loan Eligibility Criteria:
– When Would You Need a Commercial Bridging Loan for a property purchase?
– Key Steps in Securing a Commercial Bridging Loan
– Considerations When Selecting a Bridging Lender
– Assessing Loan Requirements
– How Much Does a Commercial Bridging Loan Cost?
– How to Obtain a Commercial Bridging Loan with BIG

In this article we’ll be exploring how a bridging loan can be utilised to support the purchase of a commercial property, steps to obtaining finance and assessing your loan requirements.

A bridging loan is a form of short-term lending, secured against a property. Bridging finance can support cashflow before a more long-term arrangement can be made.

Differing from residential property, commercial property is defined as any property which is not used for domestic dwelling. Obtaining lending secured against commercial property can be more complicated than a residential premises, as the use of the property can be more varied, the build of the property may vary in terms of material and layout, the demand for that type of property will also fluctuate more readily. The ongoing maintenance of a commercial premises may also be reliant upon the occupying business and revenue generated.

At BIG Property Finance we like to work with experienced property investors who own their main residence and are using the bridging loan for business purposes. We can lend against most commercial premises such as industrial units, retail premises, hotels, and offices. We are unable to lend against properties such as care homes, children’s homes or places of worship that are currently occupied by potentially vulnerable people.

So, in what circumstances would a bridging loan be preferential? Scenarios might include.

• An auction purchase when completion is required within 28 days.
• The property requires significant refurbishment or may be undergoing conversion to a residential property or change of use.
• Because a commercial mortgage wouldn’t be available in current circumstances, such as insufficient financial accounts being available to demonstrate a profitable business.
• Wanting to quickly raise capital whilst you wait for a property to be sold.

The process of obtaining a bridging loan may differ depending on whether you get financial advice or conduct your own research. Whilst the use of an advisor or broker is likely to incur some cost, you would benefit from their industry expertise and connections to lending firms. This can support your ability to obtain loan terms quickly, at a favorable rate and reduce the time it takes to place your enquiry with a reliable firm. Each lender will have their own criteria and eligibility requirements that a borrower would need to meet for them to consider providing a loan. It could therefore take some time to trawl through multiple providers yourself before finding something suitable.

• Requirements of their application process (Forms, credit searches, supporting documents.)
• Average time to loan completion – Are you working to a specific deadline.
• Whether a valuation will be required and what type/costs are likely.
• Interest rate and other associated costs – Total fees to expect.

1. What term do you require? You need to realistically estimate how long you will require to repay the loan in full following receipt of the funds. You will need to allow for time for any potential delays to your exit and your ‘plan B’ if your original exit is not possible within the intended term. It is better to slightly overestimate the term required than underestimate and risk going into default.
2. What’s the minimum net loan you require? The net loan is the final figure that will be paid to you as part of the loan monies. The net loan is the figure remaining when any associated fees or interest have been deducted, from the gross loan amount. Therefore, the money you actually need ‘cash in hand’ should be decided early on.
3. Can you afford to make monthly interest payments? One factor that can impact the net loan figure is whether your monthly interest is serviced or retained. Retained interest will be deducted in advance from the gross loan, calculated from the loan term. Whereas with serviced interest, only one month’s interest would be deducted in advance from the gross loan, allowing for a larger net loan figure. However, the monthly interest accrued would then need to be cleared monthly from your income.
4. What maximum loan can you afford to repay? Once you have secured your money, this is not the end of the road, as you will need to pay it back within the loan term. Obtaining a large loan may feel like an achievement, however if you borrow more than you can afford to pay back this could leave you in a very compromising situation. Considering your loan exit, such as selling the property, have you researched the current property market and recent demand? Do you have plans for marketing the property? Have you allowed for solicitors fees or other potential costs? Breaking down your future budget, can you still support your intended exit? What’s the maximum loan you could pay back in different scenarios?

Let’s consider the potential costs that may be incurred with bridging.

Interest rate – Commercial bridging can be more expensive than that for a residential property, but will depend upon the type of security and ‘Loan-to-value’ (LTV.) Rates are calculated monthly/annually and interest is normally retained for the loan term but may be serviced.

Arrangement fee – This fee is charged by the lender and can usually be added to the loan. Typically, you can expect this fee to be 1-2% of the gross loan amount.

Exit fee – Rarely charged by BIG, but some lenders charge an exit fee when the loan is repaid. This fee will be declared within the formal loan terms and would average 1% of the loan.

Broker fees – Most brokers charge a fee for arranging a commercial bridging loan, often 1-2% of the loan amount. Some fees are paid up front by the borrower and others are paid through the lender as a percentage of the gross loan directly to the broker.

Valuation fee – This fee is payable to a chartered surveyor and is used to assess the security property. We use the VAS panel to obtain quotations for a valuation, to get the best price/availability. The cost of a valuation will be dependent on the property value, property type and requirements of the report. For a commercial property valuation, costs tend to range from £1K to £2K, but could be much higher, it is important to establish pricing upfront.

Legal fees – You’re usually expected to pay both your own and the lender’s legal costs. Legal costs will be impacted by leases on the property, property value, nature of the transaction, and additional unforeseen complexities uncovered at a later stage.

Bridging finance can be obtained by approaching a lender directly or working with a broker/adviser who can support you through the research and application process.

At BIG Property Finance we are happy to receive enquiries through telephone, email or enquiry form on our website.

We are normally able to provide indicative loan terms within hours and a potential loan offer in a matter of days. A standard application would be completed within 3 weeks; however, we would look to align with our client’s timescale and can have funds available as soon as required, subject to completion of the required legal documents/valuation.