Saturday, June 30, 2012

Commercial Mortgages - Bridging Finance

Commercial Bridging Loans, or Gap Mortgages, have been restricted within the UK following the recession. Today it is probably considered to be the most under used form of finance. However, it is still regarded as a useful financial tool, especially to small firms that have survived the credit crunch and are looking to expand. Bridging Loans are designed to 'bridge' the gap between selling a property and buying another, hence the name. Short term funding of this sort will enable the asset to be acquired whilst the client has time to organise the longer term finances. Bridging finance can also be used to cover temporary shortfalls in a company's finance as well as to help with the expansion of business premises.

In essence, a commercial bridging loan is a very short term mortgage and, like other mortgages, it needs to be 'secured' over property. If the loan is to be used to expand/refurbish business premises then it will be secured over that commercial property. On the other hand, if the loan is being obtained by someone who is hoping to develop a new commercial project, then the loan is usually secured over the residential property of the borrower. Similarly, commercial bridging loans can be secured on most types of business property including freehold and long term leasehold properties as well as commercial investment properties. Bridging Loans are extremely popular with developers and investors as they use them to take advantage of market conditions or undervalued assets.

The amount of money that can be obtained for an advancement of this type is usually up to 60% of the property's open market value and generally has a short designated repayment term of up to 1 year. Typically, loans of this type can be obtained for 10,000 up to 5,000,000. As this is a short term loan, the less capital you require, the better, in order to ensure that you can meet the repayment terms with little problems. Furthermore, the credit repayment plan can be rolled up for the term of the loan. A business bridging loan charges much higher interest rates (around 12-15%) than most traditional advances due to the speciality nature of the credit and the repayment terms are usually interest only. As a result of the recession lenders are much more restrictive with which businesses they are willing to invest in. They often require proof that the transaction will be financially beneficial to them.

Bridging Loans are versatile in that they can be used for both residential and commercial property and land with or without planning permission. As mentioned above, a commercial bridging loan can be used for various things from business funds, to property development to initial land purchase and property refurbishment. Although, bridging finance is most regularly used when commercial property is bought at auction and capital is needed quickly to secure the purchase. Normally, a bidder has around 4 weeks to complete the purchase from the day of auction and a 10% deposit is usually required. A bridging loan can provide the quick capital necessary to meet this deposit. Being able to complete the purchase of the property quickly ensures that you beat others to the deal whilst also negotiating the best deal.

Bridging loans are also very practical and quick for companies who do not want to be locked into a long term credit agreement and who are seeking to raise money on their commercial premises. It gives them the advantage of being able to repay the debt over a short time span. A bridging loan is designed for short term finance secured against property in place of a term mortgage or conventional mortgage which would take too long to arrange or where the property itself would not form good security for the lender for mortgage purposes. Furthermore, there are instances where small businesses have no other choice but to obtain a bridging loan to avoid bankruptcy, repossessions and clean up mortgage arrears. Bridging is much quicker to arrange than a normal residential mortgage, on average taking 3-5 days from first enquiry to completion, providing all the formalities and legalities are dealt with efficiently by the borrower. It is important to know that bridging lenders look for speed and will not hesitate to pass up your opportunity if you do not provide them with the correct information in an efficient manner. The bridging finance market is a very small place and lenders will happily go elsewhere with their money, no matter how big the profit margin is!

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