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What is the difference between open and closed bridging loans?

PUBLISHED ON: 24/09/2023

How can I select the right bridging loan for my company?

Bridging loans are short-term forms of secured finance that literally ‘bridge’ a gap between funds going out of a business and monies coming in. They’re commonly used to facilitate property purchases when the purchaser wants to complete on the deal but they haven’t yet received payment from their property sale.

A bridging loan provides the funds for you to move forward with a purchase, therefore, but this type of loan must be repaid within 12 months. When you apply for a bridging loan you’ll need to provide the lender with a firm exit strategy, which in the case of property is usually using the payment from the property being sold.

There are different types of bridging loans, which address the differing needs of borrowers. Depending on your purpose for borrowing you may need an open bridging loan or a closed bridging loan. 

What is an open bridging loan?

An open bridging loan means that you don’t have to repay the loan by a set date, as long as repayment is made in full by the 12-month point. This type of bridging loan offers flexibility as you can repay as and when it’s possible during this timescale.

Open bridging loans are typically associated with higher interest rates due to the lack of a firm payment deadline, and therefore they present a greater risk to the lender. They may also be more difficult to secure for the same reason.

What are closed bridging loans?

Closed bridging loans have a set date for repayment of the funds. This provides less flexibility but can be advantageous as interest rates on closed bridging loans are typically lower.

You might choose to apply for a closed bridging loan if you know the date that your property sale is going to complete, or when your mortgage funds will be available. The lender also takes on less risk by offering a closed bridging loan, which can make them easier to access.

It’s worth noting, however, that if you don’t repay a closed bridging loan when required you’ll incur hefty penalties, so it’s advisable to be certain about when you’ll be able to access the monies.

Why you need to obtain professional advice on bridging loans

Bridging loans are flexible financial products and provide the means for businesses to develop but they also require careful consideration before going ahead. You need to be aware of the potential risk to your asset(s) when it’s secured on a bridging loan, for example, and the implications for your business.

UK Business Finance are highly experienced commercial finance brokers and will provide the independent advice you need if you’re looking for a bridging loan. We obtain the best quotes from the whole of the market and will ensure that you only proceed with the most suitable option. Please get in touch to arrange a free consultation at one of our nationwide network of offices.

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