Starting a bridging finance company: a legal guide for new lenders

Before making the first loan, prospective lenders need to establish their lending criteria and regulatory position, structure the business and its funding, develop appropriate loan and security documentation and put processes in place for due diligence, completion, redemption and enforcement.

These decisions need to work together. The terms on which a lender raises capital, for example, may affect how and when it can deploy that capital, while the lender’s proposed borrower profile and security can affect both its regulatory position and the required documentation.

Getting the legal framework right at the outset can provide a stronger foundation for individual transactions and for building a larger loan book.

If you are considering establishing a bridging finance business, contact our real estate finance solicitors for advice on lender structures, loan documentation, security and property-backed lending transactions.

1. Decide what type of bridging lending you will offer

The starting point is defining what the lender intends to finance and on what terms.

This includes considering:

• Who the business intends to lend to.
• Whether borrowers will be individuals, companies, partnerships or other entities.
• Whether lending will be for residential investment, development or commercial purposes.
• The type and value of property against which loans will be secured.
• Typical loan sizes and loan-to-value parameters.
• Whether the lender will take first, second or subsequent ranking security.
• The proposed loan term and interest structure.
• Whether interest will be serviced, retained or rolled up.
• The borrower’s proposed exit strategy.

These are not simply underwriting decisions. They can affect the lender’s regulatory position, documentation, due diligence requirements and security package.

The exit strategy is particularly important in short-term lending. When structuring the facility, consider whether repayment is expected through sale, refinance, development finance, or another identifiable source, rather than only when the redemption date approaches.

The lender should also determine its credit approval process and the circumstances in which it will depart from its normal lending criteria. Setting these parameters early helps create consistency as lending volume and value increase.

2. Establish the regulatory position

The regulatory perimeter should be considered before a new lender begins marketing or entering into bridging loans.

Whether lending constitutes a regulated mortgage activity depends on the particular transaction. Relevant factors can include the identity of the borrower, the land over which security is taken, how that land is used and whether any statutory exclusions apply.

For example, a loan to a company which is not acting as trustee, made for the purposes of its business and secured over company property, will not ordinarily constitute a regulated mortgage contract. The position can be different where the borrower is an individual or trustee and the security includes residential property.

Specific exclusions may also apply to certain business lending and bridging arrangements. The regulatory position therefore needs to be assessed against the proposed lending model rather than assumed from the description of a product as a “bridging loan”.

Where regulated activities are proposed, the lender may require appropriate Financial Conduct Authority authorisation and permissions before commencing those activities.

Operating outside the regulated mortgage perimeter does not necessarily mean operating outside all regulatory or compliance requirements. Anti-money laundering, financial crime, data protection and other obligations may still need to be considered depending on the lender’s activities and structure.

Specialist regulatory advice should be obtained where required before the lender begins trading. For a more detailed overview of the regulatory perimeter, read our guide to understanding regulated bridging loans for lenders.

3. Structure the lending business

The corporate structure should reflect how the lender will be owned, funded and operated.

For founder-funded lenders, a relatively straightforward corporate structure may initially be appropriate. Where external investors or institutional capital are involved, the arrangements can become more complex.

Considerations can include:

• The company or group structure.
• Ownership and shareholdings.
• Shareholders’ agreements.
• Reserved matters and decision-making authority.
• Director responsibilities and delegated lending authority.
• External investment.
• Arrangements between founders and investors.
• The introduction of further capital.
• Transfers of shares and investor exits.

The structure should also anticipate how the business is expected to develop. A lender that intends to build a substantial loan book or obtain institutional funding may have different requirements from a business deploying a finite pool of shareholder capital.

Clear governance is particularly important where lending decisions are being made quickly. The business should understand who has authority to approve a facility, agree changes to lending terms and authorise the release of funds.

4. Structure the lender’s funding

The lender’s own funding arrangements can be as important as the terms on which it lends to borrowers.

A new lender may initially deploy founder or shareholder capital. Other models can involve private investment, shareholder loans, institutional funding lines or facilities secured against the lender’s assets or loan book.

Where third-party capital is involved, the legal arrangements should address how funds can be deployed, the return payable to the funder, repayment obligations and any restrictions imposed on the lending business.

An external funder may also require security. Depending on the structure, this could include security over the lender’s assets, receivables or interests in its underlying loan portfolio.

This creates an important relationship between the lender’s borrowing and its onward lending. The terms agreed with the lender’s funder may influence matters such as maximum LTV, permitted borrower types, concentration limits, loan duration and the circumstances in which individual loans can be originated.

As the business grows, the ability to demonstrate a consistent approach to documentation, underwriting and security can also become important when negotiating larger or more sophisticated funding arrangements.

5. Put the lending and security documentation in place

The documentation a bridging lender uses should reflect both its lending model and the risks of the individual transaction.

Depending on the facility and borrower, the security package may include:

• Facility agreements
• Legal charges over property
• Debentures incorporating fixed and floating security
• Personal guarantees
• Corporate guarantees
• Share charges
• Assignments of relevant rights or receivables
• Priority or intercreditor arrangements
• Conditions precedent
• Board minutes and corporate authorities

The facility agreement should clearly set out the amount and purpose of the loan, interest and default interest, fees, repayment, representations and warranties, undertakings, events of default, and the lender’s rights following default.

The security package should then be considered against the particular transaction rather than treated as a standard collection of documents.

Where another lender already has security, priority becomes particularly important. A second-charge lender will need to understand the extent of the first lender’s security and whether consent, a deed of priority, or an intercreditor arrangement is required.

Where the borrower is a company, its existing charges should also be reviewed to identify restrictions or competing security that could affect the proposed facility.

Standard form documents can make repeat lending more efficient, but they should provide a framework rather than replace transaction-specific legal analysis.

6. Establish a robust process from offer to completion

A bridging lender needs a clear process for moving from credit approval to the release of funds.

Once heads of terms or an indicative offer are agreed, the lender’s solicitors usually need clear instructions setting out the approved commercial terms, proposed security, and any transaction-specific requirements.

Legal due diligence may include:

• Investigating title to the property.
• Reviewing existing mortgages, charges, restrictions and notices.
• Checking the borrower’s corporate structure and constitutional documents.
• Confirming authority to borrow and grant security.
• Reviewing searches and relevant property information.
• Considering occupational interests and leases.
• Checking the proposed security and its priority.
• Reviewing guarantees and other supporting security.
• Satisfying agreed conditions precedent.

For development or refurbishment lending, additional considerations may arise around planning, construction documentation, drawdowns and the basis on which further advances will be released.

The lender should be clear about which matters must be satisfied before completion and which, if any, can be dealt with afterwards.

Following completion, security also needs to be perfected correctly. Where a UK company creates a registrable charge, the relevant particulars generally need to be delivered to Companies House within 21 days beginning the day after the charge is created. Failure to register within the period can have serious consequences for the lender if the borrower subsequently becomes insolvent.

Property security will also need to be dealt with at HM Land Registry as appropriate.

A fast completion is valuable in bridging finance, but speed should not come at the expense of understanding the title, borrower or security position.

7. Plan for redemption, default and enforcement

A bridging loan is designed to be short-term, so the proposed route to repayment is fundamental to the transaction.

The lender should establish the intended exit before advancing funds and monitor the position during the life of the facility, particularly as the contractual repayment date approaches.

Where a loan redeems normally, the lender needs a process for calculating the redemption figure, receiving repayment, and releasing its security.

Where repayment does not take place, the documentation and security package become critical.

The facility agreement should establish what constitutes an event of default and the lender’s contractual remedies. Depending on the circumstances and security held, options may include demanding repayment, enforcing guarantees, appointing a receiver where the security permits, enforcing security over assets or commencing possession or insolvency proceedings.

An enforcement strategy should take account of the lender’s ranking, the value and liquidity of the secured assets, prior-ranking debt, other creditors, and the likely costs and timescale of recovery.

For second charge lenders in particular, understanding the first lender’s rights and the terms of any priority arrangements can be crucial before considering enforcement action.

The best time to consider these issues is when structuring the loan and security package, not after the borrower has defaulted.

Legal support for bridging lenders

Establishing a bridging finance business requires the corporate structure, funding arrangements, lending documentation, due diligence process and security package to work together.

As the loan book grows, lenders may also need ongoing legal support for individual transactions, refinances, additional advances, variations, redemptions, and enforcement.

Our corporate, real estate finance and dispute resolution teams advise lenders across these areas, providing joined-up legal support from establishing the business and its lending framework through to individual property-backed transactions.

Dylan Leet, head of real estate finance, comments:

“For a new bridging lender, the aim should be to establish a legal and security framework that works not just for the first transaction, but for the loan book you intend to build. That means thinking carefully about the facility documentation, the security being taken, the priority of that security, due diligence and the process for dealing with each loan from completion through to redemption or, where necessary, enforcement.”

If you are establishing a bridging finance business, developing a new lending product or require legal support with property-backed lending, contact our real estate finance solicitors to discuss how we can help.