What is a bridging loan?

A bridging loan is a short-term, interest-only loan designed to "bridge" a funding gap - typically when you need to complete a purchase quickly before longer-term finance or the sale of another asset comes through.

In this guide, you'll learn how bridging loans work, the different types available, what they can be used for, the potential benefits and risks, and how to decide whether one could be right for your business.

What is a bridging loan?

Bridging finance is a form of short-term borrowing, usually secured against property or land. It's designed to be arranged quickly - often within a matter of days or weeks - and is typically repaid within a few months to two years.

The most common use case is property-related: buying a new property before your current one has sold, purchasing a property at auction, or funding a refurbishment before refinancing onto a longer-term commercial mortgage.

Because of the speed and flexibility, bridging loans can also be used for non-property purposes - such as raising capital quickly for a time-sensitive business opportunity, paying a tax bill, or completing a purchase before a deadline.

How does a bridging loan work?

A bridging loan is secured against an asset - usually property - and the lender provides a lump sum upfront. You usually pay only the interest each month (or have it "rolled up" and paid at the end), and then repay the full loan amount in one go when your exit strategy is complete.

An "exit strategy" is how you plan to repay the loan. This might be selling the property, refinancing onto a mortgage, or using funds from the sale of another asset. Lenders will want to see a clear, realistic exit plan before they agree to lend.

Loan terms typically range from 1 to 24 months, and the amount you can borrow depends on the value of the security and the lender's loan-to-value (LTV) criteria - usually up to 70–75% of the property's value.

What are the different types of bridging loan?

There are two main types of bridging finance, and the right one for your business will depend on your circumstances and how you plan to repay the loan.

Closed bridging loans

A closed bridging loan has a fixed repayment date - usually because you already have a clear exit in place, such as an agreed sale on a property. Because the exit is certain, closed bridging loans tend to offer lower interest rates.

Open bridging loans

An open bridging loan has no fixed repayment date. It's used when your exit strategy isn't yet confirmed - for example, you're planning to sell a property but haven't yet found a buyer. Because the exit is less certain, interest rates are typically higher.

First charge vs second charge

Bridging loans can be arranged as a first charge (the primary loan against the property) or a second charge (behind an existing mortgage). First charge loans are more common and generally offer better rates, while second charge loans let you borrow against equity without refinancing your existing mortgage.

What can you use a bridging loan for?

Common uses include:

• Buying property at auction - auction purchases usually require completion within 28 days, far faster than a traditional mortgage allows.
• Chain-break funding - buying a new property before your current one has sold, to avoid losing the purchase.
• Property refurbishment or development - funding renovations before refinancing onto a longer-term mortgage once the work is complete.
• Buying a property that's unmortgageable - properties in poor condition may not qualify for a standard mortgage, but a bridging loan can fund the purchase and repairs.
• Raising capital quickly - using existing property equity to fund a time-sensitive business opportunity or cover a short-term cash need.

What are the benefits of a bridging loan?

There are a number of potential advantages:

• Speed - bridging loans can often be arranged in days rather than weeks or months, which can be critical for time-sensitive purchases.
• Flexibility - funds can be used for a wide range of purposes, including property purchases, refurbishments, and short-term working capital needs.
• Interest options - you can often choose to pay interest monthly, or have it "rolled up" and paid at the end, which can help if you don't want monthly outgoings during the loan term.
• Access to non-standard properties - bridging lenders may consider properties that traditional mortgage lenders won't, such as those in poor condition or without planning permission.
• Short-term commitment - because the loan is designed to be repaid quickly, you're not locked into a long-term borrowing arrangement.

What are the risks?

It's important to consider the potential drawbacks alongside the benefits:

• Higher cost - bridging loans are typically more expensive than traditional mortgages or business loans, with higher interest rates and arrangement fees.
• Property at risk - because the loan is secured against property, your property could be at risk if you can't repay the loan according to the agreed terms.
• Exit strategy risk - if your exit strategy falls through (for example, a property sale falls through), you may struggle to repay the loan and could face additional charges or repossession.
• Short-term only - bridging loans are not a long-term solution. If you can't exit within the agreed term, costs can mount quickly through extension fees or default rates.
• Personal guarantees - some lenders may require personal guarantees, which means your personal assets could be at risk if the business can't repay.

Is my business eligible for a bridging loan?

Eligibility criteria vary between lenders, but the key factors are the value and type of the security (usually property), the strength of your exit strategy, and your overall financial position.

Lenders will typically assess the loan-to-value (LTV) ratio - most will lend up to 70–75% of the property's value. They'll also want to see evidence that your exit strategy is realistic and achievable, whether that's a property sale, a remortgage, or another source of funds.

Bridging lenders are often more flexible than high-street mortgage lenders when it comes to credit history and income proof, because the lending decision is primarily based on the security and the exit. If you've had credit difficulties in the past, it's still worth exploring your options - specialist lenders may be able to help.

Bridging loan vs commercial mortgage

A commercial mortgage is a long-term loan (typically 15–30 years) used to buy or refinance commercial property, while a bridging loan is short-term (1–24 months) and designed for speed.

Bridging loans are faster to arrange and more flexible, but significantly more expensive. They're often used as a "stopgap" before refinancing onto a commercial mortgage - for example, buying a property quickly at auction, then arranging a mortgage once the purchase is complete.

If you're buying a property and don't need to complete quickly, a commercial mortgage is likely to be the more cost-effective option. If speed is essential, or the property doesn't qualify for a mortgage yet, bridging finance may be the right choice.

How do I choose a provider?

There are a number of factors it could be worth considering when comparing bridging loan providers:

• The interest rate and how it's charged - monthly, rolled up, or retained.
• Arrangement fees, valuation fees, legal fees, and any exit fees.
• The maximum loan-to-value (LTV) the lender offers.
• The minimum and maximum loan terms.
• The lender's speed of completion - some specialise in fast turnaround.
• The provider's reputation, including reviews from other businesses.
• Whether the provider is authorised and regulated by the Financial Conduct Authority.

It may also be a good idea to speak to an independent business finance advisor who can compare options across the market on your behalf.

How can I learn more?

The British Business Bank provides free guidance on business finance options, including short-term borrowing.

You may also find it helpful to read our related guides on commercial mortgages, business loans, and working capital finance.

If you'd like personalised guidance, Mark Hagan is available to discuss your situation - free of charge and with no obligation.