Auction finance explained

Buying a property at auction can be a fantastic opportunity for small business owners. Whether you’re looking for new premises, an investment property, or a development project, auctions often offer unique deals you won’t find on the open market.

The challenge? Auctions move quickly. When the hammer falls, you usually need to pay a deposit immediately and complete the purchase within 28 days. That’s where auction finance comes in.

What is auction finance?

Auction finance is a type of short-term loan that helps you quickly borrow money to buy a property at auction. Because auction properties usually have to be paid for within a strict deadline (often 28 days), standard mortgages take too long to arrange. Auction finance gives you fast access to the money so you can complete the purchase, and then you repay it once you’ve arranged a mortgage, sold the property, or found another longer-term solution. Auction finance is usually provided as a bridging loan. This is a short term form of borrowing that “bridges the gap”. The main features of auction finance are:

• Quick access to funds, often within days.

• Short loan terms, usually up to 12 - 18 months.

• Flexible repayment options, with the ability to repay once your longer-term plan is in place.

How does auction finance work?

Unlike with a more common business loan, which can take months to arrange, auction finance is designed to be streamlined. Auction finance is designed to provide funds quickly, in line with the short timescales required at property auctions. The process typically works like this:

1. Pre-approval: before the auction, buyers often get an agreement in principle from a lender to confirm how much they can borrow.

2. Winning the bid: at the auction, the buyer usually pays a 10% deposit immediately after a successful bid.

3. Accessing funds: the lender then releases the loan quickly, so the buyer can complete the purchase within the usual 28-day deadline.

4. Repayment: the short-term loan is normally repaid through refinancing with a longer-term mortgage or by selling the property.

What can auction finance be used for?

Auction finance is commonly used to purchase a variety of property types, such as:

• Residential homes

• Buy-to-let investments

• Commercial buildings

• Land

It can also be suitable for properties that are considered unmortgageable in their current condition, for example when significant refurbishment or structural work is required. In many cases, buyers use auction finance to secure the property quickly, then repay the loan by refinancing with a longer-term mortgage or selling the property after making improvements.

Who can use auction finance?

Auction finance is not restricted to seasoned property investors. A wide range of buyers can use it, including:

• Small business owners buying new premises.

• Developers looking for refurbishment opportunities.

• Investors building property portfolios.

• First-time buyers who need help meeting auction timelines.

What interest rates can you get with auction finance?

Auction finance usually carries higher interest rates than standard mortgages because it is short-term and arranged quickly. Typical rates range from 0.5% to 1.5% per month, depending on factors such as:

• The lender’s criteria

• The type and condition of the property

• The borrower’s credit profile and experience

• The strength of the repayment or “exit” plan

Borrowers with a strong track record or lower risk profile are more likely to secure rates at the lower end of this range, while first-time or higher-risk applicants may face higher costs. Since these loans are temporary, most buyers refinance after completing the purchase. Long-term products like buy-to-let, commercial, or residential mortgages generally offer much lower rates. You can read current mortgage rates for an overview of rates at the moment.

The auction process: key steps and timelines

Speed is everything at a property auction. From the first bid to final completion, here’s how the process usually unfolds and where auction finance fits in

1. Research properties in advance: read the legal pack, arrange valuations, and check whether the property suits your business or investment goals.

2. Register for the auction: provide the necessary documents and pay any registration fees.

3. Bid at the auction`; decide your limit and stick to it.

4. Pay a deposit on the day: usually 10% of the purchase price if you win.

5. Complete within 28 days: pay the remaining balance using auction finance.

You can browse upcoming auctions and property listings through platforms such as Auction House UK, Savills Auctions, and EIG Property Auctions

What are the benefits of auction finance for small business owners?

For small business owners, auction finance isn’t just about bridging a funding gap ; it can be a powerful way to unlock opportunities that would otherwise be out of reach. Some of the key benefits include:

• Speed: auctions move fast, and so does auction finance. Funds can often be arranged within days, giving you the ability to complete purchases that would be impossible with a standard mortgage.

• Confidence: with pre-approval in place, you can step into the auction room knowing exactly what you can afford, allowing you to bid with certainty rather than hesitation.

• Flexibility: auction finance is designed as a short-term solution, giving you breathing space to arrange longer-term funding or sell the property once your plans are in motion.

• Opportunity: many properties at auction never make it to the open market. Auction finance gives you the chance to seize unique deals ,whether it’s a new business premises, an investment property, or a development project.

What costs and risks should you be aware of?

While auction finance can open doors, it does come with costs and risks that every buyer should factor in from the start:

• Higher interest rates: because it’s short-term and fast to arrange, auction finance is more expensive than a standard mortgage.

• Arrangement and exit fees: most lenders charge fees to set up the loan and when you repay it.

• Legal and valuation costs: as with any property purchase, professional checks are essential and add to the overall expense.

• Refinancing risk: if you can’t secure longer-term finance or sell the property within the loan term, you could face penalties or even lose the property.

The key to avoiding problems is having a clear repayment strategy before you borrow. When used with the right plan, auction finance can be a smart tool, but without one, it can quickly become costly.

How can Capitalise help with auction finance?

At Capitalise, our Funding Specialist work with a wide network of 130 lenders to help small business owners access the right type of finance. We take the time to understand your business goals and match you with a solution that fits your needs. with auction finance, we can help you:

• See your eligibility to borrow before the auction by checking your credit score and providing insight from our expert funding specialists

• Match you with the best bridging loan provider for your needs

• Support your move to longer term finance after the purchase

• Help with other types of funding, from property finance to working capital