Bridging Finance: A Key Resource for Small Property Developers in Scotland

The property development market in Scotland has had a challenging time of late. Economic challenges, skill shortages, the wettest winter on record, and higher mortgage rates due to the Bank of England’s base rate increases. But there’s huge pent-up demand for good quality affordable homes. Scotland in fact has a 550,000 housing shortage across all tenures. According to HomesForScotland, 28% of all households currently have housing needs. That equates to 330,000 requiring affordable housing, and 220,000 able to afford a market housing solution.

While 2023-24 only saw 9,867 total new builds completed, a 20% reduction on 2022-23, there’s light on the horizon with forecasts expecting the market to turn around in 2025. And there seems to be statistical evidence to back up the optimism in 2024, including month-on-month increases in new home registrations, listings at their highest level since June 2023, a 5% increase in buyer demand and a 20% increase in the number of sales agreed in the first week of the year.

So, what’s stopping property developers from developing in Scotland? A recent survey by Gov.Scot may offer some insight. Small and Medium Sized Enterprises (SME) developers are struggling with financing. Survey respondents suggested that the UK Government could take action on finance, such as the regulation of banks, some calling for the UK Government to ‘compel the high street banks to be more positive and progressive in providing reasonable (interest level) loans to house building SMEs’. 

But when banks won’t lend to Scottish property developers – who will? The answer might come from alternative lenders.

In this article, we’ll explore how one of the most common forms of alternative finance, bridging finance, works, why it’s popular with Scottish developers, the scenarios where it proves beneficial, and key considerations for those looking to leverage this financial product. We’ll also discuss the advantages, risks, and lender requirements so you can make informed decisions about using bridging finance in your property ventures.

What is Bridging Finance?

Bridging finance is a short-term loan designed to help developers cover immediate financial gaps. These loans are typically secured against a property and repaid once the property is sold or long-term financing is secured. SME developers commonly use bridging loans to purchase properties, fund renovations, or address planning delays when traditional financing options aren’t viable due to time constraints or restrictive criteria.

The loan term generally ranges from a few months to two years, with most bridging loans structured as interest-only, meaning the principal is repaid at the end of the term. This financial flexibility is key for developers who need to act quickly on opportunities but may not have immediate access to longer-term funds.

Why is Bridging Finance Popular Among Small Property Developers in Scotland?

Small developers in Scotland find bridging finance particularly appealing due to the speed and flexibility it offers. In competitive markets like Edinburgh and Glasgow, quick decision-making is often crucial. Traditional loans, with their lengthy approval processes, can delay projects, whereas bridging loans allow developers to act swiftly—whether they’re purchasing a property at auction or addressing unforeseen development costs.

Furthermore, bridging finance offers lower barriers to entry compared to traditional loans. Large developers with extensive equity may find traditional financing easier to secure, but smaller developers with fewer financial resources often turn to bridging finance because they can use the property as security rather than relying on a long credit history or substantial reserves.

“We’ve seen a marked increase in the use of bridging loans among smaller developers and property investors in Scotland. The ability to secure funds quickly, especially in time-sensitive situations like auction purchases or refurbishment projects, makes bridging finance an useful tool.” Stephen Clark, founder of Finbri, a Bridging Loan broker serving Scotland.

Common Scenarios Where Bridging Finance Is Used

Bridging loans are versatile and can be applied to a range of development scenarios. These include:

1. Purchasing Property at Auction: Auctions require fast payment, usually within 28 days. Bridging loans provide the necessary funds while the developer arranges long-term financing.
2. Renovation Projects: Developers often use bridging loans to refurbish properties before refinancing them or selling them for profit.
3. Securing Planning Permission: Developers may need short-term finance to cover the period while waiting for planning permission approval.
4. Uninhabitable Properties: Many traditional lenders won’t finance properties deemed uninhabitable, but bridging loans can be used to make essential renovations.

These examples highlight how bridging finance helps developers navigate the time-sensitive nature of property development, offering a lifeline when other financing options aren’t available quickly enough.

How Bridging Finance Differs from Traditional Loans

Bridging loans differ from traditional property loans in several key aspects:The speed and flexibility of bridging loans make them ideal for short-term, urgent needs, while traditional loans are more suited to long-term, stable financing. 

• Term Length
  • Bridging Finance: Short-term (3-24 months)
  • Traditional Property Loan: Long-term (5-30 years)
• Approval Speed
  • Bridging Finance: Fast (within days)
  • Traditional Property Loan: Slow (weeks to months)
• Repayment
  • Bridging Finance: Interest-only, principal due at the end
  • Traditional Property Loan: Principal and interest paid monthly
• Loan-to-Value (LTV)
  • Bridging Finance: Up to 75%
  • Traditional Property Loan: Up to 60-70%

Advantages and Risks of Bridging Finance

Like any financial product, bridging loans come with both benefits and risks.

Advantages:

• Speed: One of the primary advantages of bridging loans is their quick turnaround, often available within days.
• Flexibility: Bridging finance can be used for a wide range of purposes, from buying properties at auction to financing renovation projects.
• Accessibility: Developers who may struggle to obtain traditional finance can still secure bridging loans by offering property as security.

Risks:

• Higher Costs: Bridging loans often come with higher interest rates and fees compared to traditional loans.
• Short Repayment Periods: The loan must be repaid quickly, usually within a year or two. Developers need a solid exit strategy, such as selling the property or refinancing into a longer-term loan.
• Repossession Risk: Failure to repay the loan could result in the lender repossessing the secured property.

While bridging finance is invaluable for many developers, careful planning is essential to manage these risks effectively.

Lender Criteria and What Developers Need to Qualify

To secure a bridging loan, lenders typically assess several key factors:

1. Property Value: The property’s value is critical, as lenders often offer up to 75% of the property’s worth.
2. Exit Strategy: Lenders want to see a clear plan for how the loan will be repaid, whether through the sale of the property or long-term refinancing.
3. Developer Experience: While not always necessary, having a track record of successful projects can boost your chances of securing a loan.
4. Creditworthiness: Although bridging loans are more accessible than traditional loans, a good credit history can still help secure better terms.

Understanding these criteria and presenting a well-thought-out exit strategy are essential steps in securing the best bridging finance deal.

How to Secure the Best Bridging Finance Deals

For small developers, getting the best terms on a bridging loan can make a significant difference to their project’s success. Here are a few strategies:

• Shop Around: Don’t settle for the first loan offer you receive. Compare rates from multiple lenders to ensure you’re getting the most competitive deal.
• Negotiate Fees: Some lenders may be open to negotiating arrangement or exit fees, especially if you’re a repeat client.
• Improve Your Credit Score: Even though bridging loans are more lenient on credit, a good credit score can still help you secure better terms.

By taking these steps, you can ensure that you’re not only securing the necessary funds but also doing so at the most favourable terms possible.

Last thoughts

Bridging finance serves as a useful financial tool for small property developers in Scotland, offering the speed and flexibility necessary to navigate a challenging market. With its capacity to cover short-term funding gaps and assist in time-sensitive opportunities, bridging finance can empower developers to take advantage of emerging opportunities in the property market. However, it’s crucial for developers to fully understand the associated costs, risks, and lender requirements to make informed decisions.

By leveraging this type of finance effectively and managing risks with careful planning, small developers can overcome barriers and contribute meaningfully to meeting Scotland’s housing needs.