Bridging Finance: A Flexible Solution

Bridging finance is a short-term loan, usually ranging between 6 to 24 months, designed to cover the gap between outgoing and incoming funds. Often used in real estate transactions or commercial business ventures, bridging loans work to provide access to capital, usually quicker than using traditional forms of finance, or where the traditional form of finance is not available. This enables borrowers to seize time-sensitive opportunities or address temporary cash flow issues.

Typically, bridging finance is secured against property or other valuable assets, and its flexible nature makes it appealing for individuals and developers alike. Whether you’re purchasing a property at auction, renovating for resale, or waiting for the completion of a long-term mortgage, bridging finance offers a practical solution when speed and certainty are crucial.

At AFG Law, we have extensive experience handling all aspects of bridging finance transactions with a wide range of lenders in the market to ensure all compliance requirements are met, giving us a clear understanding of their specific requirements. Get in touch today to confirm how we can assist with ensuring you can secure bridging finance.

 

Utilising Bridging Finance for Commercial Property Transactions

The commercial law team can assist businesses in completing bridging finance transactions promptly and efficiently for commercial property transactions, ensuring swift access to funds for acquisitions, developments, or refinancing.

The use of bridging loans has extended significantly into the market for property developers – in either buying a site to develop out and sell on, or when refinancing an existing site. There has also been a shift away from the use of the term “bridging” – to short-term finance.

If a developer has a long-term financing arrangement (such as a mortgage or a development loan) that is delayed or not yet finalised, they may use a bridging loan to fill the gap, allowing the project to proceed.

There has also been a shift in the due diligence that a bridging lender now requires. They can still often be quicker to turnaround than a traditional “high street” mortgage, but the level of due diligence is far from “light touch”, and it is essential that you have an experienced Solicitor acting on your behalf to ensure you have all relevant checks and balances completed to secure any finance.  The team at AFG Law will be able to manage your expectations as far as release of funds is concerned at the outset of the transaction, based on the level of due diligence required by each lender.

 

Types of Bridging Finance

There are a few main types of bridging loans of which potential borrowers should be aware:

Open Bridging Loans

This type of loan does not have a fixed repayment date, allowing you to repay it whenever your funds become available. However, lenders typically expect the loan to be cleared within 12 months, though some may offer longer repayment terms.  Higher interest rates are likely to apply due to the flexibility offered by these types of bridging loans, and their open-ended nature. They are less popular than Closed Bridging Loans.

Closed Bridging Loans

A closed bridging loan comes with a fixed repayment date, usually aligned with when you expect to receive funds, such as the completion of a property sale. This type of loan is often more cost-effective than an open bridging loan due to its reduced flexibility and the increased certainty of repayment timescales. IN the current economic climate most lenders require the certainty that this nature of loan provides – and quite often this suits the borrower better as well for budgeting purposes.

Fixed or Variable Rate

Akin to mortgages, fixed and variable rate bridging finance can be obtained.

With a fixed rate, your monthly payments remain consistent throughout the term of the loan. This option provides greater predictability and makes budgeting easier, as you will know exactly how much you need to pay each month, regardless of market fluctuations. Fixed rates are particularly appealing if you expect interest rates to rise or prefer stability in your financial planning.  To a degree however, and with bridging loans generally being offered over much shorter time periods than mortgages, the risk of significant variations in interest rates, and in turn repayment terms, is much less than a mortgage.

A variable rate, on the other hand, can fluctuate based on changes in the market or the lender’s benchmark rate. This means your monthly payments could increase or decrease over time. While this option carries more risk, it can also offer potential savings if a lender charges interest during a drop. Borrowers with greater flexibility or those expecting favourable market conditions may prefer this option.

Regardless of the type of bridging loan you choose, lenders will require a clear repayment plan, often referred to as an “exit strategy,” outlining how you will repay the bridging loan (e.g., proceeds from a property sale).  It is important that you can demonstrate to your lender, via your legal representative, that you can fulfil repayment terms and have sufficient assets in place for any charge to be placed against, in the event of a default.

 

Obtaining Bridging Finance

Obtaining bridging finance in England and Wales typically involves several steps.

First, it must be determined why the loan is needed, whether it is for acquiring property, funding refurbishment, bridging cash flow gaps, or securing planning permission. A clear purpose demonstrates the viability of the project to lenders.

After selecting a lender, submit your application. Provide a formal valuation of the property or land you intend to use as collateral although bear in mind that a lender will invariably instruct their own valuation, the cost of which will be met by the borrower. If applicable, provide proof that planning permissions are in place, or detail your plans to secure approval. Include a comprehensive project timeline, valuation fees, and previous credit history. You should also highlight how the bridging finance will facilitate each stage of development. It is important to realise and budget for, that on a property development project, a lender will release funds in tranches, once each key stage of the project has been completed and signed off by a Quantity Surveyor. There will need to be a plan in place to support this type of funding and quite often it will require the approval or support of the primary contractor.

Invariably, a lender will then instruct its own lawyers to act for them. Once instructed, the lender’s lawyer will require a costs undertaking to be provided by the borrower’s solicitor. In order to give that undertaking, the borrower’s solicitor will need to have funds in its client account – so there will be a need for the borrower to be aware of this and have the necessary funds available at the outset. The costs can range from £2,000.00 up to £10,000.00 depending upon the nature of the transaction.

At AFG Law, we can liaise with the lender’s lawyers in dealing with their comprehensive sets of requirements which will include:

• Title enquires;
• Searches or search indemnity insurance;
• Planning consents/constraints;
• Discharge of planning conditions;
• Building Regulations Approvals and Final Certificates;
• Where relevant New Build Home Warranty Schemes.

We can then proceed with the execution of the suite of facility documents. This typically includes the following:

• Legal Charges;
• Debentures;
• Facility Agreements;
• Board Minutes for Loan approval;

 

It is also the case now that when a company is borrowing bridging finance, the lender will require personal guarantees from the Directors of the borrower company, and that is something else that we can advise on as part of the transaction. A Director of the borrower company will need to receive independent legal advice (ILA) from another solicitor to ensure that there is no conflict of interest between director and borrower company. AFG Law can provide this as most lenders will accept ILA from another solicitor within the team that is not involved with the primary transaction. There is of course a separate charge for the provision of ILA.

 

Financial Compliance and Anti-Money Laundering (AML)

Satisfaction of enquiries forms only part of the overall transactional process, and once authorisation for any bridging loan has been approved, to proceed with transfer of funds, financial compliance checks will need to be completed.  Such checks are often completed at the outset of the instruction process as the lender will need to verify with whom they are loaning funds to, but wider financial checks will be mandatorily required before any final funds can be transferred.

AML checks will need to be completed by your Solicitor to verify your identity and that of any business involved in the transaction, as well as verifying any source of funds/assets being utilised to underwrite the loan.  The source and intended recipient of funds will also need to be checked and verified.

At AFG Law, we ensure that financial compliance checks are completed promptly to minimise any delay in processing the bridging loan, and so that funds reach you as time-effectively as possible. Depending on where any additional finds are coming from will also determine what additional due diligence the lender’s lawyer will require, and what if any additional documentation they may require – such as a third party legal charge or deed of postponement if there is to be a director’s loan for example from another company.

 

What Types of Properties can Bridging Loans be Used for?

Bridging finance is versatile and can be used for various types of properties, particularly in property development. Some examples include:

• Commercial Properties: Bridging loans are suitable for purchasing office buildings, retail spaces, industrial properties, warehouses, and more.
• Auction Properties: Bridging finance is ideal for purchasing properties at auction, including those that may be considered to be in an unmortgageable condition.
• Mixed-Use Properties: These are properties that combine residential and commercial units, such as a building with retail spaces on the ground floor and apartments above.
• Residential Properties: This includes single-occupancy homes, Buy-to-let properties, Houses in Multiple Occupation (HMOs), and apartment buildings.
• Land: Bridging loans can be used for undeveloped land or land designated for future development, such as properties zoned for residential or commercial use. Investors can use these loans for both new builds and the renovation or redevelopment of existing properties.

 

How long does it take to Secure a Bridging Loan?

Typically, it takes approximately 6-8 to secure a bridging loan from start to finish. This timeline can vary depending on several factors, including the type of property, the lender’s due diligence process, and the valuation requirements. For example, a desktop valuation can be completed more quickly than a full, on-site property inspection, which may extend the timeframe.

To streamline the process and minimise delays, we work efficiently and collaboratively with all stakeholders involved, ensuring that every step, from the initial application to the disbursement of funds, is handled with urgency and precision. Our goal is to provide you with access to the funds you need as swiftly as possible, keeping your financial objectives on track.

 

What are the Benefits of Bridging Finance for Property Developers?

Bridging finance offers several advantages for both individuals and property developers, enabling them to address short-term funding needs and seize opportunities. Below are the some of the key benefits:

Speed of Access to Funds

• Quick Turnaround: Bridging loans are processed much faster than traditional financing methods, often within days or weeks. This is particularly useful in competitive markets where delays can result in missed opportunities.

Flexibility in Use

• Versatile Applications: Bridging finance can be used for various purposes, including property acquisition, refurbishment, securing planning permissions, or addressing cash flow shortages.

Facilitates Development and Value Creation

• Funding Renovations and Improvements: Bridging finance enables developers to purchase properties requiring refurbishment or redevelopment that might not qualify for traditional loans initially.

Support for Complex or Unconventional Projects

• Bridging finance is often available for properties or situations that mainstream lenders may consider too risky, such as undeveloped land, properties without planning permission, or unconventional property types.

 

How can AFG Law Assist with Securing Bridging Finance?

Once you have spoken with a financial provider to provide you with a bridging loan, we would recommend that you get in touch with a Solicitor as promptly as possible to avoid delays arising in relation to the obtaining of funds.

The specialist team at AFG Law can assist with promptly processing enquiries and compliance checks on your behalf, and to assist with satisfying any requirements of the lender.  We have dealt with a number of specialist bridging companies so will be able to provide an accurate estimate of timeframe and costs at the outset.

Our commercial property team have considerable experience in dealing with all aspects of bridging finance, and with a significant proportion of such deals involving property related transactions, our adept conveyancing team are always on hand to assist.  We have a background of working with a large number of financial lenders, and understand exactly what they will need from you to move matters forward efficiently.

We take a practical and pragmatic approach when dealing with the lender’s lawyer and try to develop a relationship at the very beginning which always makes for a smoother transaction for our clients.

If you are looking to apply for a bridging loan or for further information, contact Kate.Bullen@afglaw.co.uk or Greg.French@afglaw.co.uk or, or call one of the team on 0161 359 3880.