Bridge finance is a short-term alternative that helps you “bridge the gap” between your available finances and an outstanding debt or financial obligation. A bridging loan helps to free up corporate cash flow, which can be beneficial if you have substantial pending payments or an unforeseen investment opportunity. However, bridge finance can involve high interest rates, so getting the best deal for your specific requirements is vital.
Bridge finance is a flexible financing solution, but bridging loans can only be used in specific circumstances, such as supporting a business during a financial transition or breaking a property chain.
A bridging loan is typically used when an organisation’s cash flow is low, but it expects to receive future funds later down the line. The loan is usually provided by lenders like investment banks and venture capital firms, which can make the loan risky and expensive based on the level of risk they take in releasing the funds for short periods.
There are several considerations you need to understand before undertaking bridge finance:
Bridge finance can be arranged in several ways, depending on the company’s situation. One option is a bridge loan to pay off an outstanding debt, which is a high-interest and short-term finance option that often comes with significant interest rates.
To avoid such high rates, equity bridge financing lets you quickly release equity against an existing asset. Bridging finance for property development allows you to access capital to build or redevelop a property while you pursue your next investment opportunity. For example, residential bridging loans can be used in various residential development scenarios and are very flexible.
Another common form of bridge finance is used by companies that are about to undertake an initial public offering (IPO). IPO bridge financing provides a short-term loan to cover expenses associated with going public. And, upon IPO completion, the money raised through going public is used to pay off the loan.
Bridge finance also comes in the form of regulated and unregulated bridging loans. A regulated loan is secured against a property, which can either be a property you previously resided in, your current home or a future property you intend to live in. These loans are overseen by the Financial Conduct Authority (FCA), which regulates affordability and ensures lenders examine your income streams and assess how you plan to make monthly loan repayments. Unregulated bridging loans are secured against all other types of property, including buy-to-let properties, commercial properties and property developments.
The type of bridge finance you can access is defined by open and closed loans. An open bridging loan means you don’t have a clear exit strategy or a fixed timeline for how and when you will repay the loan, which typically comes with higher interest rates. A closed bridging loan signifies a clear plan for how you’ll repay the loan, including proof of funds and a defined exit strategy.
There are advantages and disadvantages of bridge financing. On the one hand, a bridging loan gives you quick access to cash with flexible options for repayment. On the other hand, taking out bridge finance can be expensive and comes with significant interest rates and additional costs like arrangement, legal and valuation fees.
There are few limitations when it comes to bridging loans, with anything over £3 million considered a large loan. This makes them especially advantageous for ultra-high-net-worth individuals looking to borrow a significant amount of capital. Lenders can undertake a flexible and individual approach when assessing applications for high earners.
Bridging finance originated in the UK, and British lenders are typically keen to retain their highly competitive position in the global bridging market. Therefore, if you plan on purchasing a property as a foreign national, the process tends to be relatively straightforward. But your circumstances, nationality and the location of the property you intend to secure a loan against will influence how much a lender will allow you to borrow.
A bridging loan is a short-term financing option that needs to be repaid anywhere from a few days to around three years. The capital needs to be rapid as a lump sum, so lenders will want to clarify how you plan to repay it.
As a result, bridge finance has a reputation for being costly. Interest rates tend to be much higher than standard long-term finance offerings due to the perceived level of risk. However, this isn’t always the case. Rates are determined by the circumstances and viability of the transaction, the amount of time available, and the collateral assets offered as security. Your personal circumstances and how the bridging loan will be repaid are also crucial.
Your bridge finance options include three types of interest rates. The most common is serviced interest, which means you make monthly payments to the lender. Alternatively, retained interest means charges are deducted from the gross loan amount, and the lender adds all the interest to the loan balance. Rolled-up interest rates see lenders defer repayments for a specific period with interest added on a monthly or weekly basis and paid as a lump sum when the loan term ends.
Hectocorn covers both sides of the market. Our specialised bridge finance brokers will help you secure the most advantageous type of loan depending on your specific circumstances, including how quickly you need the finance and your plans to use and repay the loan.
Regardless of how complex your situation is, Hectocorn can provide you with all the necessary information on the fees you are required to pay if you take out a bridging loan. We can help you get the right bridge finance deal for your situation and keep fees to a minimum.
Discover how Hectocorn can help you invest wisely, achieve your financial goals and broaden your portfolio using bridge finance.