While short-term bridging loans for business are growing in popularity, there is still some confusion among firms about what they are and what they can be used for.
Essentially, bridging finance should be seen as a type of short-term business loan which will help a firm get from A to B until they secure a permanent form of finance or clear the bridging loan in full.
Indeed, that’s where the term ‘bridging’ comes from since it helps a business get from one position to another.
Among the differences between the bridge and traditional lending is the fact they are intended to be used for a specific short-term business purpose, unlike traditional term loans which can be used for general commercial purposes.
Another big attraction is the speed of getting the money into a business account with some bridging finance firms able to arrange a bridging loan within 48 hours, whereas High Street lenders can take weeks to complete a loan application.
Short term bridging loans UK
It also needs to be appreciated that short-term bridging loans UK can be used for a wide variety of purposes though many lenders offer their bridging loans as a form of property development finance.
The property itself can be residential or commercial or can even be a full property development.
For example, a property developer may be looking to buy a property at auction and will need to act quickly to arrange the finance to pay for the property they want to buy.
On top of this, bridging finance can be used to develop a home, for example adding a bathroom, so that it’s in a position for a mortgage lender to grant a loan application.
Whatever the purpose of the bridging finance for businesses, and there are other short-term commercial reasons for accessing them including buying stock for a promotion or refurbishing business premises, that means an application will be considered.
So, whether you are moving offices or are looking to exploit a business opportunity by securing affordable finance, then bridging loans may be the solution you are looking for.
There’s no doubt to that since the financial crisis, most High Street lenders have tightened their lending criteria which makes accessing a traditional bank loan more difficult, regardless of how successful and profitable your business might be.
A form of commercial finance that’s convenient
This also explains why businesses are increasingly looking to a form of commercial finance that’s not only convenient and quick to arrange but also affordable too when it comes to running a successful enterprise.
It is important that the business has a clear exit strategy in place before they apply which means they know when and how they will be able to repay the money.
This is when a bridging loan lender will use terms like ‘open’ and ‘closed’ to describe their bridging finance offer.
For a business, an open bridging loan is one where they do not know when they will be in a position to repay the loan, whereas a closed bridging loan means the firm does know when they can repay the money.
Businesses looking for bridging finance also need to appreciate that because this type of finance is of a specialist nature, essentially it is for a specific short-term need, then the interest rates being charged tend to be higher than those for a traditional loan.
To help with repayments, a business can choose to have the interest repayments rolled-up so that they do not have to do repay anything until the loan falls due and the interested that is rolled-up will be added to the final agreed amount.
Businesses looking for bridging finance will also need to appreciate that there may be other costs when they apply including a fee for the loan’s arrangement and also administration fees.
Bridging finance firms will have a bridging loan calculator
While these vary between lenders, all bridging finance firms will have a bridging loan calculator on their website to help firms decide whether this type of finance is for them by displaying clearly how much the loan will cost.
For some borrowers, there may be a need for legal fees and for a property being put up as security, then a survey may need to be carried out, for example by a RICS surveyor.
However, before the business begins looking for a commercial bridging loan, the firm should take stock of the situation and decide whether this is going to be the best option for them.
While a bridging loan is designed to bridge a short time period before funds become available to repay the finance, the business will need to be confident that they will be able to access the money necessary, for example boosting their cash flow with paid invoices.
It’s also important for a business to understand that bridging loans are a type of secured borrowing so they will need an asset, usually property, that can be used as collateral for the finance. It is possible to use other assets, including land, as well as stock in a bid to secure funding.