A guide to commercial bridging loans

A guide to commercial bridging loans


min read

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Commercial bridge loans can be a great way to quickly get your business up and running! We’ll discuss everything you need to know about commercial bridging loans, including how they work, the pros and cons, and more.

What is a commercial bridge loan?

Commercial bridge loans enable businesses to bridge the gap between the purchase of a new property and the sale of an existing one. Companies can access short-term financing to seize profitable opportunities without waiting to sell their property.

How does a commercial bridge loan work?

A commercial bridge loan works by providing businesses with a temporary source of capital to cover the buy price of a new property. It is typically secured against the value of the business's existing property or the property being purchased. The loan term usually ranges from a few months to a year, allowing businesses enough time to complete the sale of their current property.

When a business decides to expand or move, they may need to buy a new property before selling their existing one. This can create a financial gap that needs to be filled to proceed with the purchase. A commercial bridge loan serves as a bridge between the purchase of the new property and the sale of the existing one.

One of the advantages of a commercial bridge loan is its quick approval process. Traditional loans can take a long time to process, which may not be workable for businesses that need immediate funding. Bridge loans, on the other hand, can be approved and funded within a matter of days, allowing businesses to move forward with their plans without delay.

Interest is charged on the loan amount for the duration of the loan term. The interest rates for bridge loans are typically higher than those of traditional loans, reflecting the short-term nature and higher risk associated with this type of financing. But, businesses can often negotiate the terms and interest rates based on their specific circumstances and creditworthiness.

Upon the sale of the existing property, businesses can repay the bridge loan in full, typically using the proceeds from the sale. This allows them to close the financial gap and transition smoothly into the new property. However, if the sale does not happen within the agreed upon term, alternative repayment options may need to be explored.

One option is refinancing, where the business secures a new loan to pay off the bridge loan. This can provide businesses with extra time to sell their existing property while still fulfilling their financial obligations. Refinancing can also be an opportunity to negotiate more favourable terms and lower interest rates, depending on the market conditions and the business's financial standing.

It is important for businesses considering a commercial bridge loan to carefully check their financial situation and the potential risks involved. While bridge loans can provide the necessary funding for property purchases, they also come with higher interest rates and shorter repayment terms. Businesses should have a clear plan in place for selling their existing property and be confident in their ability to repay the loan within the agreed upon timeframe.

Why use a commercial bridge loan in the UK? 

There are several reasons why businesses choose to use a commercial bridge loan. Firstly, it allows them to take advantage of time-sensitive opportunities in the property market without having to wait for their current property to sell.

Secondly, a bridge loan provides businesses with the necessary liquidity to fund the purchase of a new property, even when their existing property may not have sold or the proceeds have not been received yet. This ensures a smooth transition and minimises the risk of missing out on profitable ventures.

Additionally, a commercial bridge loan can be used to finance property renovations or improvements, allowing businesses to increase the value of the property and generate higher returns in the long run. It offers flexibility and convenience, making it an attractive option for businesses in need of short-term financing.

What are the interest rates of a commercial bridge loan? 

When looking for a commercial bridge loan, it's important to compare different lenders' commercial bridge loan rates. Because bridging loans are generally short-term, lenders calculate the interest monthly rather than using an annual percentage rate (APR). You repay this interest in one of three ways:

  • Monthly basis: you pay the interest every month, and the lender doesn't include it in your final balance.
  • Rolled-up deal: you pay all the interest at the end of the term.
  • Retained interest: the amount you borrow covers the monthly interest payments, meaning you pay everything back at the end of the loan.

It’s also important to note that bridge loan rates are either:

  • fixed: the interest rate is fixed throughout the loan, so your repayments will be the same every month.
  • variable: your interest rate can change at any time during the terms of the agreement as it depends on fluctuations to the base rate, which means that it might go up or down without notice.


Commercial bridge loan calculator

You can calculate the cost of a commercial bridge loan based on the ratios below. These rates can vary depending on the lender but represent an average - based on our research across different lenders.

The loan-to-value (LTV) ratio refers to the loan amount divided by the property's appraised value. For example, if you plan to buy a property worth £200,000 and you need to secure a loan of £120,000, in funding then the LTV would be 60% (£120,000/£200,000).

Loan-to-Value (LTV)Rate Per Month
Up to 40%0.48%
40% to 50%0.53%
50% to 65%0.63%
65% to 75%0.69%
70% to 75%0.84%

So, if for example you have a loan amount of £200,000, and the LTV ratio is 45%, the interest on your loan will be £1,060 per month (0.53% of 200,000)

Lots of businesses use iwoca’s Flexi-Loan to bridge gaps like this - whether that’s for property or to cover unexpected costs. Some of the benefits of taking a loan include:

  • you only pay interest for each day you have the funds
  • there are no fees for early repayment
  • top-ups are available
  • there’s no obligation to take the money after approval

Qualifying for a commercial bridge loan

To qualify for a commercial bridge loan in the UK, businesses must meet certain requirements set by lenders. These requirements may vary depending on the lender's criteria and the specific circumstances of the loan.

Lenders typically consider factors such as the borrower's credit history, financial stability, and the value of the collateral. They may also evaluate the profitability and viability of the business, as well as the anticipated timeframe for the sale of the existing property.

Exploring repayment options for commercial bridge loans

When it comes to repaying a commercial bridge loan, businesses have several options. One common approach is to use the proceeds from the sale of the existing property to pay off the loan in full. This allows for a clean and straightforward repayment process.

In situations where the sale does not occur within the agreed upon term, businesses may explore refinancing options. This involves securing a new loan, often with longer terms, to replace the bridge loan. Refinancing can provide businesses with additional time and flexibility to complete the sale and repay the debt.

Risks involved with commercial bridge loans

While commercial bridge loans offer many benefits, it is important for businesses to be aware of the risks associated with this type of financing. One key risk is the potential delay in the sale of the existing property, which could result in increased interest costs and the need for alternative repayment options.

You should also consider the possibility of fluctuations in property values, as this could affect the ease of selling both the current and new properties. It is crucial to carefully assess market conditions and evaluate the potential risks before pursuing a bridge loan.

Tax implications of commercial bridge loans

When it comes to tax implications, you should consult with a professional tax advisor to understand the specific implications of commercial bridge loans. The tax treatment may vary depending on factors such as your business's structure, intended use of the loan proceeds, and applicable tax regulations.

In some cases, the interest paid on a bridge loan may be tax-deductible, while in others, it may not be. It is important to seek expert guidance to ensure compliance with tax laws and to maximise potential tax benefits.

The pros and cons of commercial bridge loans?

Advantages of commercial bridge loans

  • Quicker access to capital compared with conventional financing
  • Deferred payment: you only pay the principal and interest payments when you’ ve sold the property
  • Flexible terms: lenders are typically more flexible with their terms since the loan is temporary
  • More accessible: this type of funding is easier to gain than conventional loans and mortgages

Disadvantages of commercial bridge loans

  • Higher interest rates and potentially higher fees compared with conventional financing options (though these vary depending on the lender)
  • Shorter-term: you  typically need to repay these types of loans typically need to be repaid quickly
  • Collateral: borrowers need to give sufficient collateral to guarantee the loan

How to apply for a commercial bridge loans

Applying for a commercial bridge loan typically involves a thorough assessment of your business's financials, property valuations, and loan requirements. Different lenders may have slightly different processes, but in general, you will need to give them documents like financial statements, business plans, property appraisals, and information about how you plan to use the loan money.

It is advisable to shop around and compare loan offers from different lenders to ensure favourable terms and conditions. Engaging the services of a mortgage broker or financial advisor can also be beneficial in navigating the application process and securing the best possible deal.

Navigating the process of obtaining a commercial bridge loans

Navigating the process of obtaining a commercial bridge loan can be made easier by following a few key steps. Firstly, businesses should thoroughly research lenders and evaluate their track record, reputation, and loan terms. It is important to choose a lender who understands the specific needs of the business and offers competitive rates and flexible repayment options.

Secondly, businesses should prepare all relevant documentation and ensure that their finances are in order. This includes accurate financial statements, property valuations, and any supporting documents that may be required by the lender.

Lastly, businesses should be proactive in their communication with the lender throughout the application process. Promptly responding to any requests for additional information or documentation can help expedite the loan approval and funding process.

Determining when a commercial bridge loans is right for you

Whether you're looking to expand your business, buy a new commercial property or renovate an existing one, a bridge loan can help. However, it's important to take the time to understand what bridging loans are and compare commercial bridge loan lenders.

What other solutions are available?

Before you explore bridging loan providers, check out our article on bridge finance.

Depending on your investment needs, you could consider alternative options such as an iwoca Flexi-Loan. We offer flexible short-term finance - up to £500,000 -  that gives you the option to repay early without any fees.  

In conclusion, a commercial bridge loan serves as a temporary financing solution for businesses looking to purchase a new property before selling their existing one. It provides the necessary capital to bridge the financial gap and allows businesses to proceed with their expansion or relocation plans. However, businesses should carefully consider the terms, interest rates, and repayment options associated with bridge loans to ensure they make a well-informed decision that aligns with their financial goals and capabilities.

Article updated on:
November 15, 2023

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A guide to commercial bridging loans

Commercial bridging loans are short-term loans used to finance the purchase of a commercial property. Businesses use these loans when there is a gap between selling one property and buying another.

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