Funding Bay Blog

Interest Rates on Bridging Loans

A year of crisis, a future of opportunity

The continuing growth of activity in the UK property market has spurred a steady increase in property bridging finance over the past 20 years or so. The coronavirus pandemic has encouraged that growth to spread to business finance as lockdowns and other restrictions have led to commercial and financial delays and disruption.

Additionally, the financial authorities’ response to the economic distress caused by lockdowns has included two reductions in the Bank of England’s base lending rate. It has been at an all-time low of just 0.1% since mid-March, 2020.

All of which should have made bridging finance cheaper and more accessible. Lending to smaller and medium-sized enterprises (SMEs) more than doubled in 2020, across all sectors.

That has meant plenty of new business for lenders, so why have interest rates for bridging finance been rising over the past year or so?

Risky business

Unfortunately for borrowers, interest rates are calculated on lenders’ assessment of the risks, first and foremost, with market activity very much a secondary consideration. And business risk has risen dramatically during this pandemic.

The underlying cause has been the sharp downturn across much of the UK economy. Great Britain has been among the three worst-affected nations in the developed world.

The principal reason for that is our economic dependence on service industries and retailers, most of which have had to curtail their activity or even shut down completely.

A high proportion of the operators in those worst-affected sectors are SMEs. It’s hardly surprising, therefore, that the previous chart, showing lending growth to SMEs, gives some prominence to the expansion in loans to businesses involved in recreation, wholesale and retail trades, and hospitality (which includes tourism). Those have been among the firms most in need of quick access to funds.

The damage is done

They are also among the companies most likely to fail. Amid all of the current exuberance over the success of the UK vaccination programme, the easing of lockdown restrictions, and exhortations to ‘build back better’, it’s all too easy to overlook the widespread commercial damage already logged. Here is a reminder. Note that the chart only covers the period to end-March, 2020, so even worse seems likely to be revealed in due course. 

In such circumstances, providers of bridging loans, indeed, of any kind of finance, have become increasingly cautious. They are right to be so. EY, one of the biggest professional services firms, has forecast that business loan losses will double, at least, as a direct result of the pandemic.

Because of these elevated risks, every form of lending has become more expensive over the past 12 months. Bridging loans are by no means an exception in this respect.

Some say the best opportunities arise from a crisis. Not everyone has suffered during the current one. On-line retailing, delivery services, pets and pet supplies, car mechanics, pharmacies, etc: the list of UK businesses that have prospered during lockdowns is surprisingly long.

Even if your firm is not among that happy band, you will want to be ready for the sharp economic rebound that is already emerging from the current easing of restrictions. It’s thought likely that the coming recovery will be the strongest the UK has ever experienced.

That may require a substantial capital commitment by your firm for new or more equipment, or for new or bigger premises. How will you fund it?

Straight to the bank

Your first recourse will likely be your bank. The banks have been unusually accommodating to SMEs during the pandemic, encouraged and supported by government policy. If you have a credible plan for expanding or redirecting your business, you are likely to be well-received.

No matter how SME-friendly, however, banks are slow to process loans and disburse the money. Opportunity does not wait; neither do your competitors.

The best way to seize the moment is a bridge loan that will provide the initial portion of the required investment or working capital quickly. You can get your project underway while you wait for the bank to deliver the major part of the money.

Moreover, along with rising interest charges, the rapid growth in the bridge finance sector over the past 18 months has attracted new lenders. There are now more than 200 of them. The increased competition for new business results in tighter quotes for interest rates.

One thing that has not changed are the factors that drive the calculation of those rates. Chief among them is the quality of collateral offered. The best quality is a freehold property in good condition, in a desirable location, and not already used as collateral for any other loans.

Even if you cannot provide that level of collateral, however, the barriers to obtaining a loan are among the lowest in business finance. Credit history is not usually an important consideration, nor is proof of income generally required, however a credit check may be taken out.

That low security threshold is the principal reason that interest rates on bridging loans are significantly higher than for other types of business lending which require more detailed – and much more lengthy – prior scrutiny by providers.

Opportunities

However, if you are trying to seize a window of opportunity for new business, time is of the essence. On that basis, it is not the cost of finance that should be your top concern, but the cost of missing the opportunity.

In any case, with the help of Funding Bay, you can be sure of getting an attractive interest rate as we scour a wide range of providers to find the best deal, usually within a few days.

With that assurance, you can make the investment that will take your business to the next level.

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