Business bridging loans for property purchases and short-term gaps

The lender advances funds secured on property: the one you are buying, one you already own, or both. Interest is usually calculated monthly and can be paid monthly, deducted upfront (retained) or added to the loan (rolled up) and repaid at the end. The loan is then cleared through an agreed exit, such as a sale or a mortgage.

Open and closed bridging loans

• Closed bridge: there is a fixed repayment date, for example because a sale has already exchanged. Lenders see this as lower risk.
• Open bridge: there is no fixed repayment date, but you have a clear, credible plan to repay within the term. These are more common and can cost more.

First and second charge

A first charge bridging loan is secured on a property with no other mortgage. A second charge loan sits behind an existing mortgage and usually needs the first lender's consent.

The exit is the most important part of a bridging application. Lenders want to see exactly how the loan will be repaid at the end of the term. Common exits include:

• Sale of the property being bought or of another property you own
• Refinancing onto a buy-to-let or commercial mortgage, or onto long term business loans
• Sale of other assets, such as shares or investments
• Refinancing with another bridging lender (a less favoured exit)

Evidence helps: a mortgage agreement in principle, an agent's sale valuation or an exchanged contract makes an exit far more credible.

Companies, partnerships, sole traders and property investors can usually qualify for a business bridging loan if they can offer suitable property as security, show a credible exit within the term and, where needed, put in their own deposit; imperfect credit or limited experience is often acceptable when the security and exit are strong.

• Security: the property's value, type, condition and location. The loan-to-value ratio largely drives what can be borrowed.
• Exit: how credible and realistic your repayment plan is, and whether the timescale works.
• Experience: for refurbishments and investments, your track record helps, although first-time investors can still be considered.
• Borrower: for a limited company or SPV, lenders look at the directors and usually ask for personal guarantees.
• Credit history: relevant, but usually less important than the security and exit.

Bridging is almost always secured by a legal charge over property, normally a first charge on the property being bought or refinanced, and lenders size the loan as a percentage of its value as assessed by their own valuer.

Where the deposit is short, or the property needs work, lenders may take additional security over another property you own, with each charge registered at HM Land Registry. Commercial, semi-commercial and land security are all possible, although lenders generally lend less against unusual or hard-to-sell assets. When a limited company or SPV borrows, directors are usually asked for personal guarantees and some lenders also take a debenture over the company. Our guide to debentures and fixed and floating charges and our page on personal guarantee insurance explain what you are signing up to.

Bridging is more expensive than long-term borrowing, so it should be used for as short a time as needed. Costs vary by lender and deal. Typical charges include:

• Monthly interest, which depends on the loan-to-value, property type, exit and your profile
• An arrangement fee
• Valuation and legal fees
• With some lenders, an exit fee

Compare the total cost over the likely term, not just the monthly rate, and check what happens if the exit takes longer than planned, including any default interest or extension fees.

Most business and investment bridging is unregulated. If the loan is secured on a property that you or a close family member live in, or will live in, it is usually a regulated bridging loan with additional consumer protections. Tell us at the outset how the property is used so the right route can be taken.

Depending on your situation, alternatives include development finance, a commercial mortgage, a secured business loan over a longer term, or, for short-term business cash needs without property, an unsecured loan or revolving credit facility.