Commercial bridge loans are a crucial source of finance for companies seeking quick, short-term funding to capitalise on key business opportunities and bridge capital gaps for large purchases and acquisitions. 

This guide explores the ins and outs of commercial bridging loans, including the main pros and cons, how the loans work and key considerations for deciding whether they’re right for your business needs.

What is a commercial bridging loan?

A commercial bridging loan, as the name suggests, is a source of business finance that bridges gaps in funding. These bridge loans enable you to access capital quickly, helping you complete large-scale transactions and navigate complex situations, such as closing the funding gap between the purchase of a new property and the sale of an existing one

While typically used for commercial property needs, bridging loans can also be used for other high-value, complex purchases, business takeovers or expansions.

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‍How does a commercial bridging loan work?

A commercial bridge loan works by providing businesses with a temporary source of capital to help cover the purchase price of (and additional expenditure involved in) a new property or business asset. The loan is usually secured against the value of existing business assets and premises or the property/asset being purchased. 

Repayment terms often range from a few months to a year (or sometimes longer), allowing businesses enough time to complete the sale of their current property or receive pending revenue/funding from other means.

You can choose between using an open or closed bridge loan structure, depending on your situation. Open agreements suit borrowers without a confirmed exit strategy or who are awaiting a sale or mortgage approval. Meanwhile, closed agreements have a set end date and clear repayment schedule, usually aligned with a future property sale or when longer-term funding is due.

A key advantage of a commercial bridging loan is speed. It can take a long time to get approved for a traditional loan and for money to be accessed, which may not work for those requiring immediate funding. Bridge loans, meanwhile, can be approved and transferred within days, allowing you to operate much faster.

What are the main purposes of bridge loans for business?

Common use cases for commercial bridging loans are businesses purchasing property, developing existing premises or land and completing a company acquisition. The capital sought helps businesses to reach the funding targets required for high-value assets, investments and projects.

The main purposes of using a bridge loan in business financing are:

• Getting access to funds faster than with many other forms of finance.
• Being able to use the facility for a short period, paying back the funds quickly once a property sale or other revenue/funding sources kick in.
• Combining the finance with other funding sources as a way to reach the required sum for the acquisition.
• Having flexible repayment terms, such as open or closed options, depending on your exit strategy.
• Allowing companies to increase their growth potential and value from business properties and other business acquisitions.

Commercial bridge loan examples

Here are a couple of example scenarios where a commercial bridging loan might be used:

• A company wants to purchase a new office space before selling its current premises or simply ensure a property sale goes through by having additional capital to cover legal expenses, unexpected costs or cash flow problems caused by process delays.
• A business seeks to acquire another company but is waiting for long-term financing or investor funds to clear. A commercial bridging loan can provide the necessary capital to complete the acquisition quickly and secure the deal before it falls through or another buyer seizes the opportunity
  

Using commercial bridging loans for property development

Commercial bridge loans provide fast access to short-term capital to fund property development projects. You can use this to purchase land or existing properties while waiting for longer-term financing or planning permission. 

As high-value borrowing can be slow to secure through traditional loans and lending options, bridging finance helps developers move quickly, get projects underway and overcome cash flow issues during different stages of a build. Once the development is complete, properties are sold or longer-term funding has been secured, you can repay the bridge loan with the proceeds of the sale or via a refinancing agreement.

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Where can I get a commercial bridge loan in the UK? 

Commercial bridging loans are typically offered by specialist bridging lenders in the UK, such as LendInvest, MT Finance and Octopus Capital, plus challenger banks and peer-to-peer lending platforms. Certain high street banks offer bridging finance solutions, but often come with stricter eligibility requirements. 

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What are the interest rates of a commercial bridge loan? 

When looking for a commercial bridge loan, it's important to compare lenders' loan rates and understand the different options for paying interest. As bridging loans are generally short-term finance options, lenders calculate the interest monthly rather than using an annual percentage rate (APR). Rates usually range from around 0.5 to 2% pcm,  while you can often repay the interest in one of three ways:

• Monthly basis – paying the interest every month as part of capital repayments.
• Rolled-up – 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.

Interest rates are partially influenced by the loan-to-value ratio (LTV), which is the size of the loan compared to the value of the property/asset. 

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‍What are the different types of bridging loans?

There are several types available, each tailored to meet specific financial needs and circumstances. Here’s a detailed look at the different types of bridging loans:

• Open bridging loans: Typically used by borrowers who are uncertain about when they will receive the funds to repay the loan, such as awaiting the sale of a property, as they don’t have a fixed repayment date.
• Closed bridging loans: This means having a fixed repayment date, which suits borrowers who know when they’ll have the funds to repay the loan, such as those who’ve exchanged contracts on a property. These usually come with lower rates due to reduced lender risk.
• A first-charge bridging loan: This is where the lender has the primary claim on the property, in case of default, usually secured against a property without existing mortgages or loans. 
• Second-charge bridging loans: Secured against a property that already has an existing mortgage or loan, the lender’s claim is secondary to the first charge holder.
• Fixed rate bridging loans: Your interest rate remains constant throughout the loan term, providing predictable monthly payments.
• Variable-rate bridging loans: The interest rate fluctuates based on market conditions, meaning monthly repayment amounts are subject to change.

The pros and cons of commercial bridge loans?

Advantages of commercial bridge loans

• Faster access to capital compared with traditional financing, with fewer eligibility conditions and simpler loan applications.
• Flexible terms – lenders are typically more flexible with their terms due to the short-term nature of the loan and the complexities/uncertainty involved in property and high-value asset purchases. 
• Deferred payments – you typically pay the principal and interest payments when you’ve sold the property/asset or arranged refinancing agreements.
• Access to large sums of capital due to the value of assets used as security.
• Helping businesses acquire land or property with certain issues that mortgage lenders won't lend on.

Disadvantages of commercial bridge loans

• Higher interest rates and fees compared to traditional business loans, due to bridge loans being short-term lending with flexible conditions. 
• Shorter time to repay loans than other forms of finance for large-scale purchases, which presents risks if the market conditions change.  
• Collateral is required, which can be repossessed if you default on repayments. 

What are the main risks involved with commercial bridge loans

While commercial bridge loans offer many benefits, businesses should be aware of the associated risks. Here are some of the main risks to consider:

• Potential delays in the sale of your property/asset can impact interest payments and result in changes in property value.
• Bridging loans typically carry higher interest rates and fees than traditional loans, which increases the overall cost of borrowing.
• Assets secured against the bridging loan are at risk if you run into financial difficulties.
  

What are the tax implications of commercial bridge loans?

There are several tax implications to be aware of before you agree to a commercial bridging loan, including certain benefits. While the interest paid on a bridge loan is often tax-deductible, you’re liable for various taxes when using it for property purchases, such as:

• VAT (if you’re VAT-registered).
• Stamp duty (impacting property purchase/development project costs).
• Capital gains – if the bridging loan is for a property resale, your profits may be subject to capital gains tax.
  

Consult with your accountant or a specialist tax advisor to understand the specific implications of commercial bridge loans. Your tax requirements will vary depending on your business structure, intended use of proceeds and other factors.

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‍How to apply for a commercial bridging loan

You can apply for a commercial bridging loan through banks, finance brokers and private lenders, in person or online. Applications typically involve lenders conducting a thorough assessment of your business financials, asset valuations and loan requirements. 

Lenders all have slightly different application processes, but in most cases, you’ll need to provide some of the following documents/information:

• Financial statements
• Credit history and existing finance facilities
• Forecasting/projections
• Trading history and company structure
• Business plans
• Funding purpose and how you plan to use the loan capital
• Property appraisals/asset details (for security)

Compare offerings, terms and rates of different lenders to judge the suitability and cost-effectiveness of each solution. Seek advice from a mortgage broker or financial advisor to help you with the selection, and so you can better understand the process.

‍What are the alternatives to commercial bridging loans?

Commercial bridging loans are ideal for property purchase and covering gaps in funding required to complete high-value business acquisitions. But they’re not the only short-term finance solution available. Here are some common commercial bridge loan alternatives to consider:

• Business overdrafts: This revolving credit facility offers flexible, short-term access to funds but often comes with high interest rates and may not provide enough finance to reach your funding targets.
• Refinancing: Consolidating and renegotiating finance agreements or releasing equity from existing assets can provide capital to plug any gaps in funding needed for your purchase. 
• Invoice financing: This specific finance option enables businesses to unlock working capital tied up in outstanding client invoices, giving you fast access to significant project funds.
• Property development finance: Designed for funding property development projects, offering terms for longer timelines, this may be more appropriate than a bridging loan for developers, depending on your needs.
• Unsecured business loans: Using an unsecured loan from a digital lender like iwoca provides fast and flexible funding without the need for using property (or other business assets) as collateral. You’ll enjoy consistent and affordable repayments aligned with your cash flow.

Using flexible business loans to bridge funding gaps 

At iwoca, we help businesses to meet their growth ambitions, manage cash flow and acquire key business assets with our flexible business loans. Our finance solutions can be used for short- to medium-term funding requirements, including bridging funding gaps, covering unexpected costs and spreading the cost of high-value purchases.  

Here are just some of the benefits of iwoca’s Flexi-Loans:

• Applications are quick and easy to do online, with minimal documentation.
• Funding decisions are given within 24 hours, with money available in a matter of hours after approvals.
• You only pay interest on the funds you draw down, and we don’t charge fees for early repayment, saving you money on unnecessary interest payments once your sale is complete or long-term funding is in place. 
• Top-ups are available, subject to approval.

Find out how to get a business loan with iwoca or use our handy loan calculator to see your likely repayments. 

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Commercial bridging loan FAQs

Is a bridge loan different to a commercial mortgage?

Yes, a bridging loan and a commercial mortgage are different lending solutions. A bridging loan is a short-term finance option used for quick purchases or urgent funding needs, and typically has higher interest rates. A commercial mortgage is a long-term loan used to buy or refinance commercial property and is repaid over time with typically lower rates

You can use a bridge loan to complement a commercial mortgage, which enables you to secure the agreement, boost your deposit and lower your LTV.  

How much can you borrow with a bridge loan?

The lending amounts available in commercial bridging loan agreements can vary widely, due to the high-value assets involved, complex project components and costs and the fact that you can use them for multiple acquisitions. So, depending on your needs, funding purpose and exit strategy, you can borrow anywhere from £50,000 to as much as £250 million. 

The amount you can borrow depends on several factors, such as:

• Property value – the loan amount is typically a percentage of the property’s value, known as the loan-to-value (LTV) ratio. LTV for commercial bridge loans usually range from 60% to 75%, but can vary based on the lender and the property.
• Lender criteria – different lenders have their own specific criteria and may offer varying maximum loan amounts.
• Creditworthiness – your credit history and financial stability can impact how much you can borrow.
• Collateral – the value of the collateral you provide will also influence the loan amount you’re offered.

Can commercial bridge loans be used to cover cash flow gaps?

Yes. However, while commercial bridging loans are used to plug gaps in capital, they tend to cover temporary shortfalls ahead of a high-value purchase, as opposed to addressing general cash flow shortages. This is because they’re primarily short-term funding solutions rather than ongoing credit facilities. 

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