Article
10 mins read
Updated on 16 September 2024
Our subject expert
Rachel Jones
Partner - Commercial Property
The lengthy approval processes associated with traditional financing options can be a problem at the best of times, but especially when you need to act quickly. Luckily, the market responded to this by providing short-term financial solutions that help businesses obtain funding.
In this article, we walk you through bridging loans, how they work and how you can go about getting one to suit your commercial needs. We discuss some key legal and practical considerations that borrowers should take into account, and what options are available if you run into difficulties.
If you're considering a bridging loan or need help negotiating the terms, our commercial property solicitors can guide you through the legal and commercial risks—so you can move quickly with confidence.
A commercial bridging loan is a short-term financing option that helps businesses secure funding quickly while awaiting longer-term financing to come in place. They are termed bridging loans because they are often used to ‘bridge the gap’ between two transactions, sources of funds or your current financial needs and future income. The loan is secured against property or other assets. They usually last between 1-12 months and come with higher interest rates compared to traditional long-term financing options, reflecting the quick access to funds and higher level of risk involved. Interest on such loans is paid on a monthly basis or can be rolled up to be paid at the end of the loan term together with the balance.
Bridging loans are typically used for the following purposes:
Property purchases: bridging loans can be used to finance the purchase of a new property before the sale of an existing property is completed. This can be particularly useful in competitive markets where quick access to funds is necessary to secure a property.
Auction purchases: bridging loans are commonly used to finance property purchases at auctions where immediate payment is required. These loans provide buyers with the necessary funds to secure the property quickly, with the intention of refinancing or selling the property at a later date.
Property development: bridging loans can be used to fund a property development or refurbishment of a property project before longer-term financing is arranged. This can help cover construction costs, materials, and other expenses until the project is completed and can be refinanced or sold.
Cash flow needs: bridging loans can be used to address short-term cash flow needs or unexpected related expenses. This could include covering operating expenses, renovations, or other costs that arise before long-term financing can be secured.
Yes, bridging loans are commonly used to bridge a financial gap in commercial real-estate, such as when a borrower needs quick access to funds for a commercial property purchase or renovation. Lenders will assess and use the value of the property as security for the loan. Importantly, lenders will be interested in seeing a clear exit strategy in place to repay the loan amount (such as from the proceeds of sale of another property, refinancing onto a longer-term traditional mortgage, or another form of funds, assets or expected capital injection). The availability and terms of bridging loans for commercial properties can vary between lenders, so it's important to do your research to find the most suitable option for your specific needs.
Bridging loans can be used for various types of commercial property, including but not limited to office buildings, retail spaces, industrial facilities, warehouses, and land earmarked for development. Additionally, bridging loans can also be used for mixed-use properties, such as buildings that encompass both commercial and residential elements. They can be and have been used in a variety of industries and sectors, including healthcare, hospitality, professional services, special purposes and more. They are often used by developers and landlords to buy commercial property at auction.
Lenders often require personal guarantees (for example from directors of the borrower company) to provide an additional layer of security and assurance that the bridging loan will be repaid. This is especially the case for higher loan amounts, concerns about the borrower’s creditworthiness or riskier transactions. Personal guarantees help mitigate the lender's risk by holding the guarantor personally liable for the repayment of the loan amount, interest, and any associated costs in case the borrower is unable to fulfil their obligations.
Before taking out a bridging loan, borrowers should strongly consider seeking legal advice about the terms and conditions of the loan agreement. A solicitor can help you understand the legal implications of the loan, highlight areas of risk and negotiate on potential pitfalls, such as default provisions, interest rates, and repayment terms.
Although bridging loans by their very nature are more expensive and riskier than traditional forms of lending, this does not mean the lender can get away with clauses and practices that put you at an unfair disadvantage.
Penalty interest clause: lenders often impose an additional default interest rate that kicks in in the event of a breach by the borrower to safeguard their own legitimate interests.
Redemption difficulties: if a bridging loan agreement contains an onerous redemption clause that significantly hinders the borrower’s ability to repay, the borrower could potentially argue that the loan terms are unenforceable by way of a "clog on the equity of redemption."
Personal guarantees: although lenders routinely secure personal guarantees, their enforceability can be challenged where the guarantor can prove there was some sort of unconscionable bargaining, undue influence or misrepresentation that led them to give the guarantee.
Whether it is due to delays in a property sale, problems in securing longer-term financing, cash-flow issues, or something else, things don’t always go according to plan. Defaulting on a bridging loan can cover late or nonpayment of interest, breach of loan covenants, or a general failure to repay the full amount at the end of the term when it is due. It is best to speak to your lender if you anticipate difficulties as soon as possible, who may be willing to with struggling borrowers. In general, you may expect the following if things go wrong:
Increased interest rates: if a payment is missed, or the terms and conditions of the loan are breached, the loan agreement may document that default, higher interest rates kick in. These are likely to significantly escalate the overall cost of borrowing.
Late payment fees: the lender may apply late payment or penalty fees for each day or month a payment is overdue.
Default notice and legal action: the lender may issue you a formal notice in writing if the bridging loan remains unpaid beyond a certain point, setting a deadline for repayment. Failure to respond to the notice or make payments by the specified dates can lead to legal action and a court judgment.
Repossession: as bridging loans are ultimately a form of secured lending, with a charge placed on assets or the property in question being used as collateral, lenders can call in the security to recover their outstanding debt. In practice, this is usually used as a last resort with lenders being willing to explore other options first.
It is possible to extend the terms of a bridging loan, but it is entirely at the lender’s discretion and would largely depend on the lender’s policies, the borrower’s circumstances and the specific terms of the loan agreement. The lender may charge some sort of extension or arrangement fee. Otherwise, some lenders may be willing to offer what is known as a “re-bridging” loan to refinance an existing one.
Traditional bank loans or commercial mortgages: Traditional bank loans, including commercial mortgages or business loans, offer longer-term financing solutions with lower interest rates compared to bridging loans. These loans are suitable for borrowers with stable financials and longer-term financing needs.
Mezzanine financing: this type of financing involves obtaining a loan that is subordinate to the primary mortgage, providing additional capital but typically at a higher cost due to increased risk for the lender.
Equity partnerships: bringing in equity partners or investors can provide access to capital for commercial property transactions without taking on additional debt. Equity partnerships involve sharing ownership and profits with investors in exchange for their financial contribution.
Sale-and-leaseback arrangements: in a sale-and-leaseback arrangement, a property owner sells the property to a buyer and then leases it back from the buyer. This can provide immediate capital while allowing the owner to continue using the property.
Crowdfunding: real estate crowdfunding platforms allow individuals to invest in commercial property projects collectively. This alternative financing method can provide access to capital from a broader pool of investors.
Peer-to-peer lending: peer-to-peer lending platforms connect borrowers directly with individual lenders willing to provide financing for commercial property transactions.
Private lenders: private lenders or hard money lenders offer short-term financing solutions for commercial property transactions. While interest rates may be higher than traditional bank loans, private lenders can provide quick access to capital with less stringent requirements.
Overall, bridging loans are a flexible financial tool that can be used in various situations in commercial property where short-term funding is needed to bridge a financial gap. It is important to carefully consider the terms and costs associated with bridging loans before committing. Engaging an expert commercial property solicitor is key to help you understand your obligations and potential risks involved as well as negotiate on your behalf to protect your interests.
About our expert
Partner - Commercial Property
Rachel is a highly experienced commercial property lawyer, with more than 20 years’ experience advising businesses, lenders, investors and individuals on a wide range of real estate matters.
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