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How businesses can use bridging finance to raise money

March 25, 2018

bridgning loan explainedA form of finance which is rapidly gaining popularity in the UK business market is bridging finance. Around £750 million was borrowed through the means of bridging in the year 2011, since then it has only gone up where in 2016, this number went up by £4 billion.

The way bridging loans work is that they allow a business (or an individual) to access large sums of money within around 2 to 4 weeks.

Just like the name suggests, the loan is designed to ‘bridge the gap’ of financial opportunity which would be more expensive if you were to wait much longer for a traditional loan or mortgage.

The growth in the industry has emerged from a stricter criterion over the years by mainstream banks as well as the emergence of 40 bridging lenders who have quickly been able to establish a competitive environment for the UK bridging market to thrive.

What is Bridging Finance?

Essentially, bridging finance is type of short-term finance which is designed to appeal to those who have a strict deadline to meet. As mentioned, you would choose to apply for a bridging loan when other financial assets may too long to get your hands on or they are simply unavailable.

Typically, the amount you can borrow ranges from around the £25,000 mark to as much as £25 million.

Due to the short-term nature of a bridging loan, the length given on the term of the loan is usually only around 3 to 12 months. In some cases, companies may offer you 24 months – this is usually reserved for larger sums of money.

The Typical Terms

With a bridging loan, the applicant is expected to put down some form of security as collateral should the applicant fail to make their repayments.

What you put down as collateral will be present in the agreement between you and the lender. For businesses, the things that are usually put down on the contract are:

  • Property (Estate)
  • Premises such as office and office equipment and furniture
  • Their own business – stakes in the company
  • Client invoices and sales

The terms of bridging loans state that you should pay off the loan and the interest in its entirety, otherwise you would be at risk of severely losing out and having your property repossessed – although this is quite rare and commonly customers will ‘re-bridge’ under different terms.

As a borrower, you will typically have the option to pay off the loan in monthly instalments, interest only or rolling up the interest until the loan term ends.

Usually, a standard interest rate that is charged by lenders ranges from 0.59% to about 2% per month (Source: MT Finance).

Be aware that on top of this will be additional fees such as a 2% broker fee and administration fees. Ultimately, the amount you will pay will be unique to the lender you go with.

When might you use a bridging loan?

The most common reason a business owner may take out a bridging loan is for property development. Say that a property developer wants to reconstruct or redecorate a house in order to sell it for a larger price, then it goes without saying that they will need a sum of money to be able to carry this out.

The property developer could go down the traditional route and take out a mortgage, but this could take several weeks to be approved by a lender.

The other option is a bridging loan which will offer than a quicker means of attaining the money they need to make a profit on the property for sale.

Elsewhere, companies will consider bridging finance to fund a growth period. For a company with its own offices, it can secure the loan against the premises and uses the finance for extra staff, inventory and advertising. Once they have generated more revenue, the loan can be repaid.

Opportunities in stocks and investments may be a reason to take out a bridging loan. This will hopefully help an individual maximise their returns, but they just need that little bit of financial aid.