A bridging loan, sometimes known as bridging finance, is a viable short term lending option for many businesses. It’s called a bridging loan for a reason – it acts as a financial bridge, helping you along to your next destination. It gets you from A to B, until you have money coming in to clear the loan.
Many companies opt for a commercial bridging loan because they can be arranged in a very short amount of time compared to other types of finance. They are also available up to very large amounts – up to £20 million from private and flexible lenders. Short term bridging loans are available to individuals or businesses, but are generally used for the same purpose.
In today’s uncertain economic market, it is likely that most small businesses will experience hardship at some point. Cash flow is a major concern, as sometimes bills are going out before your clients have paid their invoices. It’s difficult to balance the books, and to keep the business going you may need to consider applying for finance.
Lots of companies depend on loans and other alternative finance solutions to keep them afloat. Most of the time it’s their only option to stop the business going bust or to keep up crucial payments. Sometimes these difficult times are out of the control of the business, it is often external factors which influence their position. However, you need a good back up financial plan to get you out of the red and into a safe place while the market improves. A bridging loan could be the answer.
What is a Bridging Loan?
The name of this loan is based on imagery – think of a bridging loan as a temporary financial bridge, to keep the borrower out of water until they can pay the money back. Bridging finance is a short term loan, up to millions of pounds, which is usually secured by against property.
What are the Advantages?
As a secured, short term loan, bridging finance can be arranged very quickly. This makes it ideal for property investors or anybody looking to buy a property at auction or looking to renovate a property for resale. Bridging loans are typically paid back between one and 12 months, which is why they are often used in buying and selling property.
However, businesses can also benefit from bridging finance if they need help with cash flow and are expecting a large chunk of income in the next year. For example, businesses with a seasonal sales fluctuation may require some extra cash in the winter, but know they will be able to pay it back in the summer when sales increase.
Bridging loans are a simple way to take advantage of short term opportunities. They are also relatively easy to be accepted for, as they are a quick loan with no credit checks – often a logical choice for lenders who have been refused for other types of loans. However, you must make sure you have a strong repayment plan in place as it can become difficult to repay the loan in such a short amount of time.
What can a bridging loan be used for?
Generally, because bridging loans are a short term finance option which needs to be repaid within 12 months, they are used for property development or purchases. For example, if you want a quick sale of a property or need urgent funds for repairs or renovations, a bridging loan could help. Most people don’t have large sums of money saved up for property investment, but taking out a traditional loan can take too long in the property chain. To take advantage of investment opportunities, sometimes bridging finance is needed.
Bridging loans are a great option at auctions and lots of buyers complete purchases with bridging finance. A typical loan from a traditional lender would probably take too long for someone who wants to snap up a property at an auction.
Another option is property investment for a quick resale. If a buyer wants to make minor improvements and then put the property back on the market to sell within 12 months, a bridging loan can assist with the initial purchase.
What happens at the end of the term?
Before taking out a bridging loan, it’s important to understand the implications of such a short term loan. The finance term usually ranges from one to 12 months, and there will be security set up on the loan if you don’t repay it in time. There will also be a lump sum of interest added at the end of the loan to take into account.
There is another option – at the end of the loan, you can convert the bridging finance to a commercial mortgage if you have used the cash for a business property. This gives borrowers even more opportunities for repayments and further investments.
If you’d like to find out more about bridging finance and how it could help you, speak to our professional brokers.
Updated: 3rd April 2018