Guide to bridge financing for businesses
Bridging finance/bridging loans are something you may have heard of or even used in the residential property market. It is also a way for businesses to raise extra working capital.
In this article, we’ll explain how bridging finance works for businesses, provide a few examples of when and how they can be used, and delve into some of the benefits and drawbacks to be aware of.
What is a bridging loan?
A bridging loan is a type of short-term finance used to ‘bridge the gap’ between two financial events. Bridge loans provide immediate cash flow until an individual or company secures permanent financing or eliminates existing obligations.
For businesses, this might mean using a bridging loan to cover the period between invoicing for work and being paid by the customer.
The critical feature of bridging finance is that it’s designed to be repaid quickly – typically within 12 months. This means that it’s generally more expensive than other types of business finance, such as an overdraft or a traditional business loan.
How does a bridging loan work for businesses?
Bridging finance for businesses works in a similar way to the residential equivalent. A lender will provide you with a lump sum of cash, which you’ll need to repay within a set period of time – usually between 3 months and 12 months.
The amount you can borrow will depend on the value of your business’s assets, such as property or invoices. The loan is secured against these assets, which means that if you don’t repay the loan, the lender could take possession of them to recoup their losses.
In what situations would a business use a bridge loan?
Here are a few examples of when businesses would typically use bridging loans:
Example #1: You’ve won a big contract, but the customer is taking 60 days to pay.
Your business has just landed a large contract with a new client. The work will take 30 days to complete, but the customer has advised that they’ll be taking 60 days to pay invoices.
In this situation, you could use a bridging loan to cover the cost of materials and labour until you’re paid by the customer.
Example #2: You need to buy premises but haven’t yet sold your current property.
Your business is growing, and you need to move to larger premises. However, you haven’t yet found a buyer for your current property
In this case, you could take out a bridging loan against your existing property to cover the cost of the deposit on your new property. You would then repay the loan once your current property is sold.
Example #3: You want to take advantage of a time-sensitive opportunity.
You’ve been presented with an opportunity to buy a competitor’s business, but you need to act quickly. The problem is that the sale price is much higher than the value of your current business.
In this instance, you could use a bridging loan to raise the extra capital you need for the purchase. You would then repay the loan from the profits of the new business.
What are the benefits of bridging finance for businesses?
There are a number of advantages to using bridging finance for businesses, which include:
1. It’s a quick and easy way to raise extra capital.
If you need to raise extra cash quickly, a bridging loan could be the ideal solution. The application process is usually much quicker than other types of business finance, such as a bank loan.
Also, if you have high-value collateral to offer, then it can be easier to get a bridging loan if you have a below-average credit rating.
2. It can be used for a variety of purposes.
Bridging finance can be used for a wide range of business purposes, including buying property, investing in new equipment, or taking advantage of time-sensitive opportunities.
3. It can be used as a short-term solution.
As bridging finance is designed to be repaid over a short period of time, it can be an ideal way to cover temporary cash flow gaps or one-off business expenses.
What are some of the drawbacks of bridging loans for businesses?
There are also a few potential drawbacks to using bridging finance for businesses, which include:
1. The interest rates can be high.
As bridging loans are typically repaid over a short period of time, the interest rates can be higher than other types of business finance. Some bridging loans may have compounding interest, which means you could end up paying back more in interest costs than you originally borrowed if your plan goes awry.
2. There’s a risk of losing your business assets.
As bridging loans are secured against your business assets, there’s a risk that you could lose them if you’re unable to repay the loan. Before taking out a bridging loan, make sure you’re confident that you’ll be able to repay it on time.
3. The fees can be high.
As well as interest, there are also usually a number of fees associated with taking out and repaying a bridging loan. These can include arrangement fees, valuation fees, and early repayment charges.
Is a bridging loan right for my business?
Bridging finance can be a useful way to raise extra capital for your business, but it’s not right for everyone.
Before taking out a bridging loan, consider whether:
- You need the money quickly.
- You’re confident you can repay the loan within the agreed timeframe.
- The costs of the loan are worth it in light of what you’re hoping to achieve with the extra funding.
If you’re unsure whether a bridging loan is right for your business, speak to an accountant or financial advisor who can offer impartial advice.
What are the alternatives to bridge financing?
If you’re looking for an alternative form of short term financing for your business, you might be better served by an unsecured business loan. Unsecured loans don’t require any collateral, so they come with a lower risk than bridging loans.
OnDeck’s unsecured business loans can give you access to between $10,000 and $250,000 to use for any business purpose, from supporting your business’ cash flow to buying new equipment and more.
Features include:
- 6-24 month terms.
- Low loan set-up fees of 3% of the entire loan amount.
- Loyalty discounts – renew your loan, and your set-up fee will be halved to 1.5%.
- Fast and simple application process – apply in minutes and get an approval decision in hours.
Frequently Asked Questions
What is meant by open and closed bridging loans?
Open bridging loans are typically used when the end date for repaying the loan is not known in advance, such as when you’re waiting to sell your property and don’t know when the sale will complete. Closed bridging loans have a set repayment date from the outset, which gives you more certainty about your repayments.
How can you use a bridge loan for business acquisition?
If you’re looking to acquire another business, a bridge loan can be used as part of the purchase price. The loan can be used to buy the shares of the business or to pay for other associated costs, such as stamp duty.
How does a bridge loan work when buying a property?
When buying a new or existing home/b, a bridge loan can be used to help you access the funding you need to complete the purchase. The loan is typically repaid when the property is sold or refinanced.
How long can I take out a bridging loan for?
The length of time you can take out a bridging loan for will depend on the lender, but most loans are repaid within 12 months.
What is the interest rate on a bridging loan?
Interest rates on bridging loans can vary depending on the lender, but they are typically higher than other types of business finance. This is because they are designed to be repaid over a shorter period of time.
Can I get a bridging loan with bad credit?
It may be possible to get a bridging loan with bad credit, but it will likely come with a higher interest rate. The higher rate of interest is applied to offset the increased risk of lending to a business with a poor credit rating.
How do I apply for bridge financing?
Lenders offering bridging finance typically allow you to apply online or over the phone. The application process will vary depending on the lender, but you will typically need to provide information about your business and your financial situation.
How long does it take for bridging finance to be approved?
The approval process for bridging finance can be quicker than other types of business finance, as lenders are typically more concerned with the value of your property than your credit score.
