How does a bridge loan work: a simple explanation

 With nearly a third of property sales failing to reach completion in the first quarter of 2024, it’s no surprise many business owners are turning to bridging loans to help them smooth out possible purchasing bumps. But what are bridging loans and how do they work? 

What is a bridging loan?

A bridging loan is a form of finance that provides short term funding to help bridge the gap between needing to make a purchase and securing further funding. Further funding might mean, for example, the sale of a property or settlement of a mortgage.

How does a bridging loan work?

The funding from bridging loans is typically provided for a period of months, not usually surpassing one or two years.

An asset is usually used as security for the loan, which means bridging loans can be larger in amount than many other short term business loans – typically, the asset being financed also serves as collateral for the loan. For example, if the bridging loan is being used to develop a property before a sale (eg turning a building into four flats before selling off each flat in turn) the property itself will likely be used as the collateral for the loan.

Bridging loans are fast by their nature. Since they’re short term loans used to provide fast funding to solve a funding problem that’s likely to be resolved within the next year, they tend to be faster for eligible borrowers to apply to than, say, a commercial mortgage.

While they may be faster to secure than a more long term business loan, they do also tend to come with higher interest rates. This is because the lender may be taking on more risk, since there’s less time for the borrower to meet the repayment obligations.

Construction projects and property acquisitions aren’t the only things bridging loans are used for. They can also be used to help smooth out the purchase of a company. Let’s say, for example, you run a business and you’re waiting for the funds to come through from your latest funding round. It’s possible you might decide to use a bridging loan to cover costs like payroll, inventory, or rent while you wait. You would then use the funds from the investment round to repay the lender.

Example of a bridging loan

Let’s say you want to develop a new plot of land into a block of flats. You plan to sell the flats within the year, in fact, you even have a buyer lined up. You’ve got an exit plan (the buyer you’ve already lined up), and you’ve got your business plan, cash flow projections, and the project blueprints, but you don’t have the funds to purchase the plot of land.

You’ve had great success purchasing smart properties at auctions, which on the one hand is great as it means you know how to secure a good deal, but on the other hand, is a problem as commercial mortgages aren’t as accessible when it comes to buying auction properties. You plan to head to the auction house this weekend and there are a few lots of land that you’d like to bid on. But the auctioneer would need the funding immediately and your usual lender won’t provide a mortgage before you even know which plot of land you intend to buy.

In this instance, you could use a bridging loan in the form of auction finance to purchase the land from the auctioneer. You could then either repay the loan after a few months with a mortgage or some form of property development finance, or, you could repay the loan at the end of the agreed year once you’ve completed the project and closed the sale.

Find a bridging loan

Whether you’re looking for a bridging loan to support the purchase of a commercial property, or you need to cover working capital costs while you wait for your latest funding round to settle, we may be able to help. We’re bridging loan brokers – we help match eligible borrowers to our network of over 120 lenders, offering between £1,000 and £20M. Just click the link below and submit your information and our team will be in touch to let you know if there’s any way we can help out.

Find a bridging loan.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.