Using a bridging loan to buy business premises

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Why use a bridge to buy your business premises?

A commercial mortgage for an owner-occupier is usually the lowest-cost long-term way to own your premises, but it is not always the fastest. Banks will want two or three years of accounts, management figures, a full valuation and credit committee sign-off. That process can take longer than a seller will allow.

Owner-occupiers typically turn to bridging finance when:

• The landlord is selling and you have a short window to buy the building you already lease.
• A neighbouring unit comes up and you need to secure it before a competitor.
• The property is at auction, with completion typically due within 28 days.
• Your accounts are not ready yet, for example after a strong recent year that has not been filed.
• The building needs work before a bank will lend against it.

For wider business uses such as cash flow or tax bills, see business bridging loans. If you are buying at auction, read auction bridging finance before you bid.

How does the bridge then refinance plan work?

The plan has two stages, and both should be mapped before you commit to the purchase.

1. Bridge to complete. The bridging lender values the premises and lends against them, often within a few weeks where valuation and legal work move quickly. You fund the deposit, stamp duty and costs.
2. Refinance to own. Once the business can present its accounts, the owner-occupier mortgage is applied for. The new lender repays the bridge, and you move onto a longer term with monthly capital and interest payments.

We look at the refinance at the outset, not at the end. If the business will not meet a mortgage lender's affordability test, the bridge has no exit and we will say so. Our guide covers the difference between a commercial bridge and a commercial mortgage in more depth, and the bridge vs mortgage calculator compares the costs.

What will the owner-occupier mortgage lender look for?

The bridge is only as good as the refinance behind it. Owner-occupier commercial mortgages are underwritten on the business, not just the building.

Area	What the refinance lender assesses	How to prepare during the bridge
Trading history	Usually two to three years of accounts	Have accounts filed and management accounts up to date
Affordability	Profit available to cover the mortgage payments with headroom	Model the new payment against current profit before you buy
Rent saving	Rent you will no longer pay once you own	Show current lease and rent clearly
Property	Value, condition, use class and saleability	Complete any works the valuer flags
Deposit and equity	Mortgage LTV is often lower than bridging LTV	Plan for any shortfall between the two loans
Directors	Experience, credit history, guarantees	Resolve any credit issues early

A common surprise is that the mortgage lender lends a lower percentage than the bridge. If that happens, the gap has to be found from cash or other security, so plan for it from day one.

What happens if the premises include a flat you will live in?

Many shops, pubs and small mixed buildings come with a flat above. If you, or an immediate family member, will live in the flat, the loan may be a regulated mortgage contract. We introduce any case like that to a firm directly authorised by the Financial Conduct Authority, so the right checks are made. We are not directly authorised by the Financial Conduct Authority ourselves.

If the flat is let to an unconnected tenant, or used only for business purposes, the bridge is usually unregulated and we arrange it directly. Lender appetite for semi-commercial premises also depends on the split between the commercial and residential parts. Our semi-commercial bridging loans page explains this, and the regulated vs unregulated guide sets out where the line falls.

Which entity should buy the premises?

Owner-occupiers usually choose between three structures:

• The trading company buys it. Simple, and the business owns the asset directly. The building is exposed to trading risks.
• A separate property company buys it and leases it to the trading company. This keeps the property apart from trading risk and is common in family groups.
• The directors or a pension scheme buy it. Personal ownership or pension ownership has its own rules and lender appetite.

Bridging lenders can lend to any of these, but the refinance lender may have preferences, particularly where a property company leases to a connected trading company. The right structure depends on your tax, legal and succession position. Take advice from your accountant and solicitor before you exchange. Our guide to bridging for limited companies covers the lending side.

What does it cost to buy premises with bridging finance?

Budget for both stages, not just the bridge:

• Bridge costs: monthly interest, an arrangement fee of typically around 1% to 2% of the loan, valuation, legal fees on both sides and any exit fee.
• Purchase costs: deposit, stamp duty and your own conveyancing. In England and Northern Ireland, non-residential SDLT is 0% up to £150,000, 2% from £150,001 to £250,000 and 5% above £250,000; Wales and Scotland have their own taxes.
• Refinance costs: mortgage arrangement fee, a second valuation and further legal work.

Keeping the bridge term short is the most effective way to control cost. Where the business can afford it, serviced interest avoids interest compounding on the balance. See our rates page for how pricing is set and use the bridging cost calculator for your figures.

When should you go straight to a commercial mortgage instead?

If the seller will give you eight to twelve weeks, your accounts are filed and strong, and the premises are in good order, a direct owner-occupier mortgage is usually cheaper. Bridging adds a second set of fees and a period of higher interest. We will tell you if waiting for the mortgage is the better route, and our alternatives to bridging guide covers other options such as delayed completion or vendor finance.

For longer-term finance on this type of property, see our sister site Commercial Mortgages Broker.

Unregulated commercial and investment bridging is arranged directly. Any case where the security includes a home you or an immediate family member occupies, including a flat above commercial premises, may be regulated and is introduced to a firm directly authorised by the Financial Conduct Authority. We are not directly authorised by the Financial Conduct Authority ourselves. Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.