Bridging Loan for Commercial Property

Bridging loan for commercial property is a short-term financing solution designed to help businesses and investors secure commercial real estate quickly. 

In the UK commercial sector, bridging loan completions increased by 28% year-on-year, reflecting rising investor confidence and a surge in development activity.

Unlike traditional mortgages, which can take months to process, bridging finance provides immediate access to funds, allowing for swift property purchases, redevelopment projects, or business expansion.

This type of loan is particularly useful when an opportunity arises that requires fast action, such as buying property at auction or refinancing an existing loan. 

What is a Bridging Loan for Commercial Property?

A bridging loan for commercial property is a temporary loan used to finance the purchase or refurbishment of business premises, such as office buildings, retail spaces, warehouses, or mixed-use properties. 

It is secured against the property itself and typically lasts between a few months and two years. 

Bridging loans are commonly used by investors, developers, and business owners who need urgent access to capital but plan to refinance or sell the property in the near future.

Unlike standard commercial mortgages, which require extensive credit checks and lengthy approval processes, bridging loans focus more on the asset’s value and the borrower’s exit strategy. 

Lenders assess whether the borrower has a clear plan for repaying the loan, either through selling the property, securing long-term financing, or generating rental income.

How Does a Bridging Loan for Commercial Property Work?

Bridging loans operate on a secured lending basis, meaning the lender requires collateral, typically in the form of the commercial property being purchased or another high-value asset.

The amount borrowed is usually based on a loan-to-value (LTV) ratio, which can range from 60% to 75% of the property’s value.

Data from Q1 2024 shows that the average loan-to-value (LTV) for bridging loans was around 60%, which highlights the risk assessment standards applied by lenders in this market (source)

The funds are provided in a lump sum, and interest is charged monthly. Borrowers can choose to pay interest monthly or have it rolled up into the total loan amount, to be repaid at the end of the loan term. 

Repayment occurs when the borrower secures long-term financing or sells the property.

Key aspects of how bridging loans work for commercial property:

• Loan Term: Typically 3 to 24 months.
• Interest Payments: Monthly or deferred until repayment.
• Exit Strategy: A clear plan is required to repay the loan.
• Security: The commercial property is used as collateral.

How To Use Bridging Loans for Commercial Property

Bridging finance can be used in various scenarios involving commercial real estate. Some of the most common applications include:

1. Purchasing Commercial Property Quickly

Traditional mortgages can take months to approve, whereas a bridging loan enables investors and businesses to secure property almost immediately. 

This is particularly useful when purchasing properties at auction, where completion is required within 28 days.

2. Refurbishment and Development Projects

Commercial properties that require renovations or conversions may not qualify for conventional mortgages. 

Bridging loans provide the necessary funds to complete improvements before refinancing with a long-term commercial loan.

3. Preventing Property Chain Breaks

Businesses or investors selling one commercial property to purchase another may face delays in their sales process. 

A bridging loan ensures they can proceed with the new purchase while waiting for their existing property to sell.

4. Refinancing and Business Expansion

Companies looking to expand or relocate may use a bridging loan to finance their new premises while arranging long-term funding.

Interest Rates and Costs of Commercial Bridging Loans

Bridging loans typically have higher interest rates than standard commercial mortgages due to their short-term nature and associated risks. 

Interest rates usually range between 0.5% and 2% per month, depending on factors such as the loan amount, property type, and borrower’s financial profile.

Additional costs associated with commercial bridging loans include:

• Arrangement Fees: Typically 1-2% of the loan amount.
• Exit Fees: Charged upon loan repayment (not all lenders apply this fee).
• Valuation Fees: Required to assess the property’s value.
• Legal Fees: Cover legal documentation and property searches.

For example, if a business takes a £500,000 bridging loan with an interest rate of 1% per month for 12 months, the total interest cost would be £60,000, plus any additional fees.

Eligibility Criteria for Commercial Bridging Loans

To qualify for a commercial bridging loan, borrowers must meet certain criteria, including:

• Strong Exit Strategy: Lenders require a clear repayment plan, such as selling the property or refinancing.
• Collateral: The commercial property or another asset is required as security.
• Loan-to-Value (LTV) Ratio: Typically up to 75%, though some lenders may offer higher LTVs with additional security but this rare, a typical LTV will be lower than 75%.
• Experience: Property developers and investors with previous experience have a higher chance of approval.
• Credit History: While less critical than with standard loans, a good credit profile improves loan terms.

Advantages of Using a Bridging Loan for Commercial Property

Bridging finance offers several benefits for commercial property buyers:

• Fast Approval and Funding: Unlike traditional lenders, bridging finance providers can approve and release funds in days.
• Flexible Terms: Borrowers can choose interest payment structures that suit their needs.
• Allows for Property Investment Opportunities: Enables businesses and investors to act quickly on time-sensitive deals.
• Can Be Used for Various Property Types: Suitable for office buildings, retail spaces, warehouses, and mixed-use developments.

Frequently Asked Questions (FAQs)

1. Can I get a bridging loan for an unoccupied commercial property?

Yes, but some lenders may have restrictions. It’s essential to demonstrate how the property will generate income or be sold.

2. What is the typical LTV for a commercial bridging loan?

Most lenders offer up to 70% LTV, but higher LTVs may be available with additional security; however, as mentioned, a higher LTV than this is rare. 

3. Do I need a deposit for a commercial bridging loan?

Yes, borrowers usually need to provide at least 30% of the property’s value as a deposit.

4. Can I use a bridging loan for business expansion?

Yes, bridging loans can be used to finance property purchases for business growth and expansion.

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.