Commercial Bridging Finance for Commercial Property: What You Need to Know

By: Aaron Robbins0 comments

When it comes to purchasing or refinancing commercial property in Australia, bridging finance can be a valuable tool to facilitate smooth transitions. Whether you’re a seasoned investor or a business owner looking to expand, understanding the ins and outs of bridging loans is crucial.

This comprehensive guide will delve into the key aspects of bridging finance for commercial property, its benefits, eligibility criteria and considerations to keep in mind.

What is commercial bridging finance?

Bridging loans are a short-term funding solution designed to bridge the gap between purchasing a new property and selling an existing property. Bridging loans provide the necessary funds to complete a property transaction when the timeline doesn’t align. Bridging loans are particularly popular in the commercial property sector, where timing and flexibility are essential.

How does a bridging loan work?

A bridging loan is a secured loan, meaning that the lender uses either the new or existing commercial property as collateral to help secure the funding. Businesses often use a commercial bridging loan to acquire a new workshop, office space, or other industrial premises to support their operations.

There are two forms of bridging loans for commercial property purchases, open and closed bridging loans.

Open Bridging Finance

Open bridging finance is generally the more flexible option of the two. It is suitable for borrowers who have not yet finalised the sale of their existing property. An open bridging loan allows borrowers to access funds for a more extended period, typically up to 12 months or sometimes longer. This extended loan term gives borrowers more time to sell their existing property and repay the loan.

Unlike closed bridging finance, open bridging finance has no fixed repayment date. Instead, the loan is usually repaid in full when the existing property is sold. This flexible repayment structure allows borrowers to focus on the sale process without the pressure of fixed monthly repayments. One of the downsides to the added flexibility of an open bridging loan is that it will generally attract a higher interest rate compared to closed bridging finance. The increased risk of not having a finalised sale makes lenders charge a premium for this type of funding.

Lenders offering open bridging loans may provide conditional approval based on the borrower’s estimated equity from the sale of the existing property. The loan amount approved will depend on factors such as the estimated sale price, expected settlement period, and other conditions set by the lender.

Closed bridging loans

Closed bridging loans are typically provided over a shorter duration compared to open bridging finance and are suitable for borrowers who have already exchanged contracts on the sale of their existing property. The loan term is often limited to a few weeks or months, ensuring that the loan is repaid promptly upon settlement of the sale.

With closed bridging finance, the borrower has a fixed repayment date. This means the loan must be repaid in full by a specific deadline, regardless of whether the property sale has been completed. The fixed repayment date gives lenders more certainty and reduces the risk associated with the loan. Because of this lower risk, closed bridge loans usually carry lower interest than open bridging loans.

It’s important to remember that lenders offering closed bridging loans generally require proof of the sale contract and settlement date for the existing property. The loan amount approved will depend on the purchase price of your commercial property, the expected proceeds of your existing property’s pending sale, and your individual circumstances.

How are bridging loans repaid?

A bridging loan is typically repaid once the borrower secures a longer-term commercial loan to take over from the short-term bridging loan. This is why it’s so important for lenders to devise an exit strategy for repaying the loan, and will generally set the repayments as interest-only until you’re able to repay the full principal amount borrowed.

Who can use a bridging loan for commercial property?

Most lenders offer bridging loans for commercial property to business borrowers. Business bridging loans are commonly used by property developers to create a property chain so that they can get started on a new development project while waiting for the existing property’s sale to finalise.

However, you don’t need to be in the property development industry to access the benefits of a commercial bridging loan. If you have an ABN or ACN, available equity in an existing property, and want to acquire a new commercial property, then bridge loans may be accessible to you!

Benefits of using a short-term bridging loan for commercial property purchases

Swift transaction: Bridging finance enables quick access to funds, allowing you to promptly secure your desired commercial property. At Diverse Funding Solutions, we can provide same-day funding in some instances.

Flexibility: Bridging loans offer flexible repayment options, providing borrowers with financial flexibility during the transition period.

Leverage opportunities: It helps bridge the timing gap between selling your existing property and purchasing a new one, avoiding missed opportunities.

Buys you time: Bridging finance provides breathing room, allowing borrowers to sell their existing property at a more favourable price instead of rushing into a sale.

What business owners should consider before using a bridging loan

Taking out a commercial bridging loan isn’t a decision that should be made lightly.

Fluctuations in property prices can impact the sale value of your existing property, potentially affecting your ability to repay the bridging loan. Also, if this is your first time taking out a bridge loan, you must consider the higher interest rates and fees compared to other business loans or conventional mortgages you may be more familiar with.

As bridge loans are provided based on an exit strategy, you must consider what would happen if your exit strategy fails. This situation could leave you in a financially precarious situation. Always have contingency plans in place. Engaging legal and financial professionals to guide you through the process and ensure you fully understand the risks and obligations involved is always a prudent choice.

Can I get a bridging loan with bad credit?

Short-term bridging finance is often offered by private lenders in Australia. The benefit of private lending is not only the fast funding and minimal documentation needed for an application but also the ability to offer more flexible lending criteria, including the ability to ignore a credit check. By assessing your individual circumstances and financial situation, a private lender can work with you to devise a suitable exit strategy and repayment strategy to support the bridging loan.

At Diverse Funding Solutions, you don’t need to let bad credit affect your ability to access commercial bridging finance — we work with over 200 Australian private lenders who offer commercial bridging loans to Australian businesses.

If you need short-term finance to acquire a commercial property, then talk with us about how we can assist (and experience our excellent customer service!).

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