Introduction to Bridging Loans

Bridging loans are a short-term loan, usually for 12 months or less, that can be used by businesses, partnerships and individuals for any purpose until a more permanent style of funding can be put into place or a property is sold.

It can provide quick, relatively easy finance which is secured on any asset (but usually property), for borrowers who need a quick loan turnaround.

There are two types of bridging loans:

A Closed Bridge

This is used when a borrower knows the date when finance will be available to repay the bridging loan and that date is incorporated within the terms of the bridging loan. Typically this will be used when someone has sold a property and the completion date for that sale, and consequently the repayment of the bridge, has been fixed.

An Open Bridge

This is where the borrower does not know the exact date that funds will become available to repay the bridging loan but sets out a plan to the lender showing how the loan will be repaid. This may be that the property that is being sold to repay the loan is partially through the sale process, but the completion date has not yet been fixed.

With an open bridge, the lender will still specify a date by which time the lender will expect to be repaid.
The one defining feature of a bridging loan is the speed in which it can be put into place. With more conventional mortgages or commercial finance, the process can take several weeks and in many cases several months. A bridging loan can be put into place within a week in many instances.
A huge advantage of such finance is that it is a way for anyone to proceed with their property purchase plans quickly. Most bridging loans have a term of about a year, though they can be as short as a month and as long as three years.

The purpose of the bridging loan is to buy the borrower time to either put longer term finance into place, or complete the sale of another asset (usually property) in order to repay the loan.
They can be used by businesses or individuals and have many different uses.
It is important to look at the overall cost of a bridging loan in order to work out which will be the most cost-effective for you. That means taking into account the interest rate being charged as well as any broker, lender, and legal fees that will be incurred. It doesn’t always follow that the deal with the lowest interest rate will be the one with the lowest costs overall.

It is true to say that the majority of bridging loans are used to buy property. Buyers at auctions, property developers, and people stuck in property chains can, and do, benefit from using bridging loans. They can even be used as a way of assisting people building their own homes. However, they can be used for many other purposes as well.

Businesses can use a bridging loan for business purposes such as buying stock or plant and machinery; either as a short term fix or as a bridge while different funding is put into place.
Unexpected costs or tax liabilities can also be funded through a bridging loan. No matter what the purpose is for quick short term finance, a bridging loan should be explored as a possible solution.