The bridging finance sector has grown dramatically over the last 5 years. In 2011, it was worth £750 million in but is now valued at around £4 billion in the UK.
Bridging is a type of finance used for businesses to ‘bridge the gap’ and pay for a large purchase where there is a strict time deadline. With loans available for up to £25 million and only lasting a maximum of two years, the idea is that the loan will either be repaid upon the sale of something or is used before more finance becomes available.
Loans are most commonly secured on a property or a business asset and by having this security means that interest rates remain relatively low at around 0.59% to 2.0% per month. Additional fees can be charged by brokers for commission (up to 2.0%) and procurement fees (up to 2.5%). (Source: Bridging Loan Hub)
About the industry
There are around 40 major bridging lenders in the UK and thousands of brokers that have emerged in the last two years. There are only a few lenders that facilitate deals that run in the hundreds of millions of pounds. Some of the companies with the biggest market share include Dragonfly, West One Loans, Precise Mortgages and MT Finance.
The industry is divided between regulated and non-regulated lenders and whilst they all have to follow FCA guidelines, the non-regulated firms do not necessarily have to carry out credit checks and can charge higher interest rates. A main distinction is that they cannot lend to an individual if the property in question is their primary residence.
How bridging is used for property
For homeowners, bridging loans can be used if they are desperate to complete on a property but they still need the finance from their existing home which they have not sold yet. Using bridging finance, they are able to borrow and purchase the new property and repay the loan once their existing home has been sold.
It is a popular finance option for property developers who are competing for the purchase of a property and want to close the deal quickly. Funds are likely to be available within 2 to 4 weeks, which is significantly quicker than a mortgage application and all the property chains associated with a traditional mortgage.
Another common use of bridging finance is to pay for a property that was purchased at an auction. Once the gavel falls, bidders have 28 days to come up with the money to pay for their estate. Rather than wait for a mortgage agreement to go through, they can find faster finance through a bridging lender or broker.
How start ups can use bridging finance
Very fast growing start-ups can apply for a bridging loan in order to fulfil a certain order or help accelerate their growth. Whether the loan is secured on their office building or equity in their business, the money can be used to purchase equipment, hire new staff or invest in technology.
Again, the idea is that the loan will repaid upon hitting a certain target or exit; so if the start-up makes a huge return in the next year or sells their business, they are able to repay their loan effectively.