In today’s lending market, there is a diversity of finance types to suit the needs of every business and its unique challenges. One of these types is bridging finance.
Bridging finance is a short-term solution, so is useful to enterprises who need an injection of cash over a limited period. As the name suggests, these loans are often used to ‘bridge the gap’ when companies are awaiting other forms of finance.
In this blog, we explain what bridging finance entails and how it could benefit your business.
What is bridging finance?
Bridging finance can be used by both individuals and businesses, usually lasting less than 12 months. They tend to offer a maximum of £5 million worth of lending, though it may be possible to get larger loans through specific lenders. How much you are able to receive will vary depending on the security you offer, as well as the lender you choose.
Bridging loans come in two types: open and closed. An open loan is where there is no fixed end date to the loan, but it is expected that you will pay the balance back within a year. This is ideal if you aren’t quite sure how long you will need the finance for: for example, if you know you have long-term funding coming in, but don’t know when this will start exactly.
Alternatively, a closed loan will have a set end date. This means you will have an exit from the finance in place, which usually means lenders are willing to offer lower interest rates as they know they will be repaid in the agreed timeframe.
As per any loan, you will need to apply for bridging finance. Bridging finance is secured, so you will likely need to have some form of assets to use as collateral as well as a clear strategy on how the bridging finance will be exited e.g. a property sale. When seeking the loan for commercial purposes, you may also need to share your business plan with the lender.
In recent years, there has been an increase in the number of providers offering bridging loans. This is particularly down to the fact that increased due diligence from banks and traditional lenders have extended the process time for loan applications, leaving many people seeking solutions to obtain quick funds. As a result, there is now a broader market, giving companies a better chance of finding a lender that suits their needs.
When could you use bridging finance?
Bridging finance is often associated with property, such as when somebody wants to buy a new home but hasn’t yet sold their existing one. This makes it popular with investors, landlords and property developers, as well as when buying a property at auction. The bridging loan fills the role which will be taken by a mortgage once the sale has completed.
In business, this might apply to acquiring new premises, such as getting a store in a new location or buying new office space to accommodate growing operations. In this context, the property you are buying acts as collateral for the loan, whilst a commercial mortgage is being put in place.
Another potential use for bridging finance could be for an investment opportunity (such as property or an acquisition) in which you need to raise funds for before a specific deadline.
Pros and cons
There are many benefits to bridging finance. As we have already mentioned, the main advantage is the quick access to funding, as well as the ability to fill short-term finance gaps in your business when you are between other forms of capital. Lenders are often agile and swift to process applications, meaning funds can be released after a turnaround period as short as 24 hours.
While some lenders will consider your credit history before accepting you, it is possible to get ‘non-status’ loans which do not take into consideration your credit score or risk and instead focus on exit for the bridging finance. This means that even companies who have struggled to get finance elsewhere may be able to access a loan.
Due to the short-term timeframe associated with bridging finance, even if you pay off the loan early, there is normally a minimum loan term and as such no penalties per se.
There are some downfalls of bridging loans versus a standard loan. Due to the short-term nature of the finance, interest rates tend to be higher – usually around 0.5-1.5% per month. There are also commonly fees to pay, including arrangement fees and other legal fees, which you will need to account for. There may also be exit fees.
Bridging loans offer the choice of retained or serviced interest payments. In a serviced interest arrangement, you make the monthly interest payments. Where it is a retained arrangement, you make no interim payments but at the end of the term, the full cost of the loan including the interest is repaid.
Bridging loan providers are not always regulated by the FCA, meaning that borrowers are less protected. It is therefore essential to do your research beforehand to make sure you are committing to a credible lender and carefully read the fine print to make sure you aren’t entering into a bad deal.
Get advice
Bridging loan is a viable option for businesses needing short-term funding, particularly to cover the acquisition and development of new premises or other investment opportunities. However, as with any type of funding out there, it won’t be suitable for everybody.
As such, it is crucial that you carefully consider your needs and whether bridging finance covers them, as well as compare the available lenders.
If you need advice on whether bridging finance could work for you or what the alternative arrangements may be, we are here to help. Our team of expert advisors have experience working in a range of industries, businesses and utilising different finance solutions, meaning we can help you to find the right path for you and your unique situation.