The Security of Bridging Loans
13th November 2024
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Bridging loans are an important source of commercial finance for businesses looking to ‘bridge’ gaps in their cash flow and aid the purchase of significant, infrequent expenses such as new business premises.
In the majority of cases, however, bridging loans are secured, reducing the associated risk for lenders while providing flexibility for borrowers.
A number of assets can be used as security for a bridging loan, such as existing property, land or other assets. Discover our guide to bridging finance security below.
What is a bridging loan?
A bridging loan can be generally described as a short-term loan that can be used to bridge the gap between financial transactions. These bridging loans can be both secured and unsecured and therefore have a number of possible use cases, including:
- Protecting cash flow while waiting for bank payments
- Emergency property renovations
- Property purchases
- Unplanned business opportunities.
Short-term in this instance typically refers to a 6-12 month loan, which generally holds higher rates of interest in line with the shorter-term loan length. Our extended guide on bridging finance rates provides more in-depth knowledge of typical interest rates for these kinds of loans.
One of the largest advantages offered by a bridging loan, however, is the flexibility provided by their fast approval times, and easier-to-meet lending criteria.
The difference between a secured and unsecured loan
The difference between a secured and unsecured loan hinges on collateral.
Under a secured bridging finance loan, the creditor will specify one of the debtor’s assets to use as collateral. This means that, in the event that the debtor cannot meet the agreed-upon repayments for the bridging loan, this asset will become the property of the creditor.
In an unsecured bridging finance loan, there is no collateral involved. However, these carry higher interest rates because the creditor is assuming a higher level of risk.
Unsecured loans will typically have higher interest rates, and may have stricter lending criteria – creditors will wish to see more of a guarantee that a business is capable of meeting a bridging loan repayment plan if there is no collateral involved.
What is a bridging loan secured against?
A number of different assets, including existing residential and commercial properties, can be used as collateral; there are a range of factors at play that stipulate the required value of the collateral item or asset.
The overall loan-to-value (LTV) ratio in the purchase of the property or asset will help dictate the required collateral. For example, if your business has 90% of the required funds to purchase the new asset, but uses a bridging loan to increase their capital, the relatively low LTV of 10% means that limited collateral will be required.
Inversely, if the majority of the business capital used to purchase the property or asset comes from an external loan, expect a high-value asset to be used as collateral.
Understanding bridging loan fees has never been easier, thanks to Anglo’s bridging loan fee calculator. To find out more, give it a go!
Residential properties
Existing residential properties are commonly used as security for bridging loans, particularly in the purchase of buy-to-let properties and in the world of property development.
In many circumstances, loans secured on a primary residence must be regulated by the Financial Conduct Authority (FCA).
For existing homeowners looking to expand their home portfolio, using a highly valuable asset such as your existing home can make your proposal far more attractive to creditors.
There are of course risks associated with this however – you run the risk of your home being repossessed in the event that you default on your bridging loan repayment schedule. Ultimately, you could find yourself (and possibly your family) homeless.
Commercial properties
Commercial properties are also often used in these circumstances, particularly in the event of your business looking to expand from one location to two. Using the existing premises as collateral could significantly reduce the interest rates associated with your bridging loan.
Using a commercial property as collateral carries many of the same risks as using a residential property, with the risk of repossession in the event that you are unable to repay the loan.
If using a commercial property as collateral, debtors should be aware of the risks associated with down periods in revenue and the subsequent impact that losing a property could have on your ability to recoup revenue.
However, by accessing a new location, your business can expand its revenue stream, placing you in a far better place to repay the loan while retaining a healthy cash flow.
Is a bridging loan a secured loan?
Bridging loans can be regulated or unregulated in accordance with the property or asset used as collateral in the purchase of the new property.
For example, bridging loans that are secured against a property that is the borrower’s primary residence (or will become their primary residence in the future) are regulated by the FCA. This helps ensure that borrowers remain protected under specific consumer protection rules. These include fair treatment standards and comprehensive affordability checks.
However, if a bridging loan is secured against a property used for commercial, business or investment purposes – simply, any property that does not involve the borrower’s primary residence or personal use – FCA regulation does not apply.
These types of unregulated loans are commonly used by property developers, investors, or businesses looking for quick access to funds.
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Get in touch
Still unsure about how bridging loans are secured? If you’d like to find out more about our bridging loans and the assets that you’re eligible to use as collateral, our team are always on hand to help.
Head over to our contact us page to find our details, or send us an email at enquiries@angloscottishfinance.co.uk.
If you prefer to give us a call, you can reach our office at 0191 410 4776.
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