Holly Andrews, Managing Director, KIS Finance
If you are looking to grow your business by investing in a new premises, or perhaps by developing your current premises, bridging finance can offer a fast way to achieve this. But what if you don’t have the spare cash to put down a deposit and need to borrow the full amount of the purchase price? This is where 100% bridging finance could help your business.
How to get your current business assets working for you
If you own other business assets, such as properties, vehicles or machinery, you can use these as additional security to help you to obtain 100% bridging finance on a new commercial property purchase.
Having additional security in place will allow you to raise the full amount needed to purchase the premises, as well as reduce the interest rate that you’ll be charged as it will lower the overall Loan to Value. With a standard bridging loan, the maximum Loan to Value is typically around 75% of the property’s value, which translates to you being able to borrow about 75% of the purchase price, having to put in the rest yourself as a deposit.
Using additional business assets will increase the overall value of the security you are borrowing against, enabling you to borrow more.
For example, if you want to purchase a property valued at £200,000, a standard bridging loan would usually allow you to raise around £150,000 – 75% of the value. However, if you used an additional property, or other business asset, worth £100k (with no mortgage or any other borrowing secured against it) as security, the bridging loan can be raised against this too.
Therefore, you could raise 75% of the total value of the property you are planning to purchase plus the value of the additional assets together; £200k + £100K = £300k x 75% = £225k. This would enable you to borrow enough to purchase the new property without needing to find additional funds to put in.
Using a second charge bridging loan
Even if you already have a mortgage, or a different type of secured loan, on a property that you want to use as additional security to purchase a new business premises, you can still use this asset by taking the bridging loan out as a second charge.
As long as there is sufficient equity* in the property,you will be able to use it as security.
This could be a property already owned by the business (perhaps a shop or office block) or even your private home. However, it is important to remember that any assets you place a charge against will be at risk if you default on the loan, so make sure you are not over-stretching yourself financially.
*Equity is the value of the property that you own outright, unmortgaged. For example, if you own a property worth £250,000 and there is a mortgage of £100,000, your equity is £150,000.
Using 100% bridging to purchase under market value
In some situations you may be able to obtain a 100% bridging loan if you’re purchasing a premises for your business, but it requires renovation or refurbishments to be carried out before it is fit to use.
In this case, you could agree a price with the seller based on the property’s current value and then undertake the necessary improvements prior to the sale completing. You may then be able to raise finance on the new value, with the works completed, but still buy the premises for the previously agreed price.
For example, a property in need of work has an asking price of £250,000. You agree with the seller to purchase the property in a couple of months’ time for this price. You also agree that, in the meantime, you will undertake improvement works costing £50,000 which will then raise the value of the property to £350,000.
You can now raise bridging finance based on the value of £350,000 but still purchase the property for the original agreed price of £250,000. This will enable you to borrow the full purchase price of the property as the Loan to Value would be less than 75% of the new market value of the property.
Don’t forget the Stamp Duty!
When you are calculating how much you need to borrow, particularly if you are looking to avoid having to put in any cash yourself, make sure you allow for the Stamp Duty Land Tax which is applied to commercial properties over £150,000. If you forget to allow for this, you could find yourself falling short!