With the effects of the 2008 global financial crash still being felt in the financial market, the popularity of bridging loans provided by alternative lenders is continuing to grow.
- What are commercial bridge loans?
- Can I get 100% bridging finance?
- Are bridging loans available for mixed-use developments?
- How quickly can I get a bridging loan?
- Can I still obtain a bridging loan if I have credit issues?
With the UK facing an uncertain economic future and High Street banks becoming stricter with their lending criteria, interest in bridging loans looks set to continue.
With this increased interest in commercial bridging loans, more people are seeking to understand the intricacies of this method of funding. To help, we have taken some of the most common queries and provided an overview of each – read on to find out more.
Commercial bridging loans are short-term sources of finance for business purposes. They are normally used when finance is needed quickly. To qualify for a commercial loan, a proportion of the asset used as security should be used for business/commercial use. For example, if you are thinking of buying a shop or an office with a flat above that you are thinking of living in yourself, the commercial part of the building would qualify the whole building for this type of bridging loan. If you are going to rent the flat out as a commercial enterprise, this would count towards the commercial aspect of the whole space.
Commercial bridging loans are used for buying commercial property or starting a new business. They can be used in circumstances when it is difficult to get a commercial mortgage, or if finance is needed for the startup of a business. They can also be used for buying at auction, or when funding is needed quickly. Businesses who struggle to get traditional types of finance such as new ventures or small businesses, find them a useful source of short-term funding. Approval is usually given on the value of the property used as security and the exit strategy, rather than basing a decision solely on the applicant’s income.
Commercial bridging loans can also be used to provide working capital. If, for example, the business is looking to sell shares or assets to raise funds for business use, a commercial bridging loan can be used in the interim period to cover the ongoing costs of running a business.
A 100% bridging loan is a loan where the lender provides funding to the total value of the property which is being used as security. Typically, lenders will provide a percentage of the value of the property, known as Loan To Value (LTV).
However, in some circumstances, lenders may offer up to 90% LTV or even higher. To be in with a chance of a larger LTV, lenders will look for extra security to safeguard against the increased risk. This could be in the form of multiple properties or high-end assets such as stocks and shares. To apply for a higher LTV, lenders look favourably at a good solid personal guarantee and a clear exit strategy.
If the borrower defaults on the loan, all the assets are at risk. However, it is important to note that these types of loans usually incur higher fees, as each asset will need to be individually valued before being accepted as security.
Occasionally lenders will take into account the market value rather than the purchase value, which can increase the amount of bridge funding you can apply for. Bear in mind this strategy is not common though, so it is best if possible to try and raise as much capital as possible.
Mixed-use development is the term used for projects that include a mixture of different uses and can refer to land or buildings. It can refer to a single building which contains a mix of offices and apartments. Other examples include High Street property with retail space and a flat above. It can also apply to an area that includes multiple buildings for retail space plus car parking, recreational areas and community amenities. Mixed use developments have become more of a focus in recent years, aimed at re-inventing community areas in urban societies.
Commercial bridging loans can be used for virtually any business use, including mixed-use development. The general rule is that as long as a proportion of the space is earmarked for commercial or business use you can apply for a commercial bridging loan, although this may vary between lenders.
One of the big advantages of using a bridging loan is how quickly funding can be acquired. The length of time will depend on what company you use, but funds can be released within days of the application. However, two to four weeks is a common time frame. The Novellus time frame is typically two weeks as we do not have to wait on a credit committee for decisions, although we have been known to approve a loan from start to finish in 24-48 hours and a one-week completion is not uncommon. Commercial bridging loans obviously have a big advantage over traditional mortgages when comparing these approval and completion time frames.
Finance options are limited to those who have poor credit rating and credit issues. When applying for traditional funding, such as a High Street loan or mortgage, or even a credit card. Credit rating is one of the first factors to be considered.
However, it can be possible to obtain a bridging loan, even if you have credit issues. When approving a bridging loan, lenders biggest concern is the exit strategy and the assets used as security. If credit history affects this, then the application will be in jeopardy. For example, the exit strategy for many bridging loans is long-term finance such as remortgaging. If credit issues are likely to prevent long term finance, this will have implications on the likelihood of a successful Bridging loan application. If the intention is to sell the property that is being used as security with the loan, the application may be considered more favourably.
Some lenders specialise in helping customers with credit issues, whereas others will consider each application individually before making a final decision. Some credit issues will be ranked higher than others, so if there has been an occasional missed credit card payment, this will have less of an effect on the application than an Individual Voluntary Agreement or a bankruptcy. Time will also have an impact; the older the credit issue the better for the success of the application.
All lenders will complete a credit check before making a final decision, although bridging lenders tend not to add as much weight to the credit score system utilised by traditional finance lenders when looking at an application. The applications at Novellus are looked at on a case-by-case basis and individually assessed for risk. No credit issues are always going to be the most attractive option for lenders, but this is not the only criteria considered when making a decision.
Other criteria include the exit strategy, the security, business plan, deposit and how experienced an applicant is.
Novellus approve bridging loans on a case-by-case basis and do not follow a fixed product or set criteria model. They have no credit committee to answer to, all enquiries go directly to the decision makers. We welcome applications from all parties, including limited companies and partnerships. We will consider each one individually.
When looking at an application, Novellus considers the security options and exit strategy first. If the company applicant has experience in the property investment, the application will be looked at favourably, although it is not the only factor to be taken into account. Other important aspects include how much deposit the company can provide. Typically, Novellus offer loans to values of 50-70%, although companies looking for 80-90% can be accommodated depending on the circumstances.
Commercial bridging loans offer many advantages to businesses looking for funding options. Finance is made available quickly, which allows the borrower to fund investments quickly and therefore secure potentially long-term lucrative deals. The repayment period is decided prior to the loan being approved but should the business be in a position to repay earlier than planned, there are no early repayment fees with Novellus. In certain circumstances, it’s possible to secure a higher percentage of the property value, which makes it an attractive proposition for businesses that have high-value assets but low cash flow.
However, before being approved the exit strategy (how the loan will be repaid) has to be firmly in place. Also, this type of loan does require high-value assets as security, to protect the lender from the borrower defaulting on the loan. The fees are generally higher than a traditional mortgage but these are agreed on upfront, so the borrower knows in advance the total repayment costs.
A commercial bridging loan can be the difference between property acquired or property lost. They can also bank role a business when cash flow is stretched. As long as there is a definitive exit strategy in place, commercial bridging loans can help your business flourish.