Commercial Bridging Finance
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Commercial Bridging Finance
John talks to us about commercial bridging finance and when this can be a suitable option.
Podcast approved by The Openwork Partnership on 08/10/2024.
What is commercial bridging finance and how does it work?
Commercial bridging finance is a type of finance that provides the funds to either purchase or refinance commercial property.
Similar to conventional mortgage term finance, the lender will use the commercial property as security to lend the funds. The value of the property will also be a factor in determining how much you could apply for and borrow.
Another similarity is that a deposit will be required if you are looking to purchase a commercial property. If you’re looking to refinance, there will need to be a certain level of equity in the property.
Who is commercial bridging finance for? What can I use this for?
Commercial bridging finance appeals to different types of people in different situations. It could be used by anyone from developers to investors, or even commercial owner-occupiers.
There are several scenarios where you might use it. Usually a client would come to me for commercial bridging finance if they need funds quite urgently.
They might only have a couple of weeks to obtain the funds – there may be time restrictions in place on the purchase. Commercial bridging finance provides a greater level of certainty in obtaining these funds compared with other methods.
Another scenario where commercial bridging finance might be an attractive solution is where an investor or developer is looking to purchase a commercial property. On completion they plan to change the class use, or redevelop the property to something different.
An example would be turning a commercial property into residential. This is quite a popular strategy in the post Covid climate, with more companies adopting a work-from-home approach and leaving some office blocks surplus to requirements.
The bridging finance allows the client a greater level of flexibility to complete the renovations, compared with other finance options out there.
How much can I borrow?
Borrowing potential will be assessed by a lender or underwriter by reviewing numerous factors, which again is very similar to a standard mortgage.
For example, they will look at the type of property you are purchasing or refinancing. If you’re developing the property, they will want to know the gross development value (GDV) when you exit the bridge finance.
It could also even be impacted by your experience in property investment and development. Have you done this for a couple of years? Are you fairly new to the industry?
How long does it take to get a commercial bridging loan?
It’s very quick, but there will be variations in how rapidly you could access the funds. Again, it’s down to factors such as the lender recommended, their service levels and how quickly the valuation of the property could be completed and returned to the lender or underwriter.
You’d generally be looking at a couple of weeks turnaround from application to withdrawing the funds.
What if I have bad credit? Can I still get commercial bridging finance?
You could. Another similarity to the regulated world of residential lending, is that certain lenders won’t be willing to lend you the funds based on your adverse history.
But if you work with an advisor who has a strong range of lenders to choose from, you’re likely to be able to gather the funds required, subject to a full application. It will also come down to other factors.
Lenders will ask questions about the significance of the adverse credit, and how viable and strong the exit strategy is. If you’ve had adverse credit in the past, the focus on those aspects might be a bit stronger.
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Do I need an exit strategy?
You will need an exit strategy. The whole point of any bridging finance, not just commercial bridging, is to provide a way to get you from A to B in a short time period. We’ll generally be looking at six to 12 months.
And unlike standard-term finance that investors might have had experience with previously, bridging interest is charged monthly, not annually. This makes the viability of the exit strategy so crucial. You have to make sure that the bridging finance could be repaid and doesn’t become overly expensive. With interest charged monthly, fees and costs could quickly rack up.
To put it into context in a real life environment, let’s imagine a developer has taken out bridging finance to redevelop an office block into residential flats. Once the redevelopment has been completed, he would then be able to apply for his exit strategy and redeem the bridging finance in full.
The exit strategy could be a number of things. In this example it could mean refinancing the newly developed property onto a different type of finance, like a conventional mortgage; or selling the property and using the sale funds to repay the bridge in full.
What other costs are involved with commercial bridging finance?
Some noteworthy costs include an application fee and possibly a product fee. The product fee is usually a percentage of the loan amount. We’re typically looking at 1% to 2% of the loan applied for.
In addition, a valuation will need to be completed on the property being used as security for the lender, and this usually carries a fee.
The final costs will be legal fees, and it’s well worth outlining how much they’re going to cost to put into your budget plan. It might also be possible to capitalise some of these fees to the loan – most likely the application and product fee. Sometimes we could delay the timing on when the client would actually pay them.
How does the application process work? How can a broker help here?
The application process is similar to a standard mortgage application in that you will submit the application, detailing the level of funds required and why you require those funds. This will include your business plan and your exit strategy.
An underwriter will then request evidence to review your application further, and the property will always be valued, because the loan is secured against it.
If the application is approved, the funds are generally made available in a timely manner. With a couple of lenders, you will have access to those funds in a couple of days.
In terms of what an advisor could do, it’s all very time consuming. Putting the application in and the administration side could take a while. An investor or a developer will most likely have a very busy day-to-day schedule – so having to take control of the application could take up time that could be better spent elsewhere. An experienced advisor could take that pressure away and free up that time.
PLEASE NOTE, THIS IS A REFERRAL SERVICE.
COMMERCIAL LENDING AND SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
COMMERCIAL LENDING IS NOT PART OF THE OPENWORK PARTNERSHIP’S OFFERING AND ADVICE IS OFFERED BY THE FIDUCIA NETWORK LTD. THE OPENWORK PARTNERSHIP ACCEPT NO RESPONSIBILITY FOR THIS ASPECT OF OUR BUSINESS.
Approved by The Openwork Partnership on 08/10/2024.
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