When it comes to property development, bridging finance can be a crucial tool for small and medium-sized developers looking to secure funding quickly and efficiently. As a type of short-term loan that is designed to "bridge" the gap between the purchase of a property and the sale or refinance of that property, it can be particularly useful for developers who need to move quickly to secure a property, but who do not have the funds readily available to do so.

Here, we explain everything you need to know about bridging finance, how it works, and its main uses in the context of property development.

What is bridging finance?

Bridging finance is a short-term loan that is typically secured against property or land. The loan is designed to provide funding quickly, usually within 3-4 weeks, and is typically repaid within 12-18 months. Bridging finance can be used to finance a wide range of property-related projects, including property development, refurbishment, and conversion.

How does bridging finance work?

Bridging finance works by providing a short-term loan that is typically secured against the property or land being purchased, or against another property or land that the borrower owns. In most case, the loan is repaid when the property or land is sold or refinanced on to a development loan.

The amount of bridging finance that can be secured will depend on the value of the property or land that is being purchased, as well as the borrower's creditworthiness and ability to repay the loan. Generally, a property valuation and planning report will be required in order to assess the condition of the property or land and likelihood of the anticipated exit route being achieved, such as detailed planning permission being secured.

When should you use bridging finance?

Bridging finance is often the ideal option when securing the acquisition is the priority and it can be used for a number of activities, such as when buying a property at auction or purchasing land for property development pending detailed planning permission being secured.

The main uses typically include:

• Property acquisition: Bridging finance can be used to purchase a property quickly, which can be particularly useful in a competitive market.
• Refurbishment: Bridging finance can be used to fund the refurbishment of a property, which can increase its value and make it more attractive to buyers or tenants.
• Conversion: Bridging finance can be used to fund the acquisition and conversion of a property, once planning has been secured (if required), such as converting a commercial building into residential apartments.
• Development exit: Bridging finance can be used to fund newly completed residential developments, pending sales to owner occupiers.

What are the risks of using bridging finance?

While bridging finance is a common type of finance package for small and medium-sized property developers, it’s important to be aware of the risks associated with it. Borrowers should be mindful that interest rates are typically higher, due to the short-term nature of the loan, and it’s also important to have a clear exit strategy in place in order to repay the loan when it becomes due. This may involve securing either development finance or longer-term financing, selling the property, or using other assets to repay the loan.

Overall, bridging finance can be a useful tool for property developers and investors who need to secure funding quickly and efficiently. While there are risks involved with any type of lending, bridging finance can provide a flexible and cost-effective way to fund a number of property-related projects.

If you need access to capital for your next property project then we may be able to assist. Find out about our specialist bridging finance options.