What Are the Two Main Types of Bridging Finance?

By Darren Horne

Bridging finance comes in two distinctly separate flavours, each of which is used to secure short-term finance for the purchase of a commercial property, although they are each suited to a specific situation. Below we will define these two forms of bridging finance, and try to explain the major differences between them and in which situations each of them would be most suitable.

The closed bridge - straightforward bridging finance

Closed bridge is the name used to define the simpler of the two forms of bridging finance. Open bridging finance is being easier to obtain, and in many ways the cheapest. The term closed bridge is used to define a form of bridging finance which is secured to make up a financial shortfall in the short term, and to provide the finance to purchase the target property when the sale of existing property, for which the proceeds from the sale are to be used to finance a new property purchase, has passed the exchange of contracts stage of the deal. This is the most common form of bridging finance, and usually it is provided over a short-term, until the property deal in question has completed. Of the two forms of bridging finance this is the type that comes with the lowest interest rate, as commercial lenders see closed bridging finance as being a fairly low risk form of lending, as is seldom a property deal falls through once the contracts have been signed.

The open bridge - bridging finance with a risk

Open bridge is used to define the concept of a bridging loan which is supplied to make up the shortfall in the finances for the purchase of a target property, when the proceeds from sale of an existing property are yet to be received, and the property for sale has not reached the contract stage of the property deal. In some extreme cases the original property may not even be on the market yet. This form of bridging finance usually carries a much higher interest rate due to the fact that commercial lenders see this as a fairly high risk form of lending. When applying for open bridging finance, applicants will need to demonstrate a clear exit strategy and demonstrate a provision for dealing with the situation whereby the bridging loan comes to term, and the existing property has not been sold, and thus the funds are not available to pay off the loan in the way in which it was intended. In this situation an alternative form of repayment must be evident.

Applying for bridging finance in the commercial arena is historically a complicated and time-consuming process. It is highly advised that you take the advice of qualified commercial bridging finance brokers, your broker will be able to assist you with every step of the application process, and help you with any problems that may arise, ensuring you have the highest possibility of achieving a positive outcome in your application for bridging finance.

Darren Horne is Managing Director of Best Commercial Finance Ltd who are commercial mortgage brokers offering bridging finance.