Bridging finance can be a useful form of short-term finance for a small business, whether you are looking to support your capital funding, invest in a property or cover any other funding requirements. In this article, we explore what a bridging loan is, why it can be useful for a small business and what is needed to apply for one.
What Is A Bridging Loan For A Business?
Bridge loans may also be referred to as caveat loans, standby facilities or swing loans. They have become a more popular method of short-term finance in the last decade as they can be set up relatively quickly and are often simpler to arrange than other forms of finance.
Put simply, a bridging loan is a type of commercial loan that allows you to borrow money over a shorter period of time (normally less than a year) than a typical bank loan, but often at a higher rate of interest. In effect, they’re a ‘bridge’ to a more permanent source of finance for a business, whether that’s a loan or income from sales.
This is often a finance type worth considering when you want to capitalise on a deal that is time-sensitive and failing to raise sufficient funds will cause you to lose out on the deal.
It is also worth noting that normally there are two main types of bridging loan to consider: closed and open.
Closed bridging loans have a fixed short-term repayment date whereas open bridging loans have no fixed repayment date, however, lenders usually expect repayment within a year.
It is highly likely that as a small business, you will need business financing to get off the ground or to stretch to fulfil a business goal. There are many finance options available, and the suitability of each will depend upon the needs of your business and its current circumstances.
In this article, we are just exploring the potential benefits of a bridging loan for your small business, that are worth taking the time to ponder. When taking out any type of loan, it is recommended that expert advice is taken to reduce the risk as much as possible and ensure that you are aware of all of your options.
How Does A Bridging Loan Work?
A bridging loan for a UK business requires the borrower to put up assets as security against the loan. Typically, this security will be a property or land, but some businesses may be able to use other high-value assets instead.
A lender will provide up to a certain percentage of the value of the security you put up. This is known as the ‘loan to value’ ratio or LTV.
The lender will charge interest on the loan, the rate of which is based on the amount borrowed and how much risk the lender believes it is taking on by offering the loan.
How Do Bridging Loans Benefit Small Businesses?
There are several reasons why small business owners should consider enquiring about bridging loans through an accredited broker.
Firstly, start-ups, small and medium businesses often require a large injection of money in order to expand which may be difficult to secure from a bank or building society, especially in a tricky economic climate.
Also, as short-term bridging finance can be arranged quickly and with less onerous underwriting than other types of borrowing. Depending on the lending terms, you can access very competitive interest rates and flexible repayment options, provided your exit strategy and business plan are fit for purpose.
Why Are Small Businesses Turning To Bridging Loans?
The role of bridging has become an increasingly popular way for companies to raise finance in the UK. There is speculation that this has been fuelled by UK banks having tighter lending criteria due to them losing their appetite for risk amidst an uncertain economic climate.
By turning their backs on small businesses, banks have created a gap in the market for alternative finance. For businesses that are struggling temporarily with cash flow or are in need of a quick injection of capital, these methods provide essential funds needed to aid their growth.
What Can I Use Bridging Finance For?
Whatever your reason for needing finance, you’ll need to have a clear business plan and exit strategy in place. This will help the lender to decide whether they approve financing you. Amongst other things, bridging loans can be used for purchasing:
A property at auction
Land for development
Property that is ‘uninhabitable’
Stock
Machinery or equipment
Is The Bridging Industry FCA Regulated?
The bridging industry is FCA regulated which means that brokers and lenders require authorisation to be fit to trade in the industry.
How Do You Apply For A Bridging Loan?
When it comes to completing any type of loan application, it helps to have your documentation prepared.
Depending on your project, the lender will likely ask you for evidence of the following:
Proof of ID
Exit strategy
Valuation report
Business plan
Proof of income
Are You Prepared To Apply For A Loan?
Taking a risk by seeking financial support in business can seem daunting but is often essential in order to grow. To help with the process, having a clear and concise business plan in place can be overlooked, but should always be considered. Further, in order to impress investors and lenders, specifically formed sales forecasts and financial projections for your business are also a necessity.
Therefore, if you would like help with putting together your business plan, get in touch today! Contact us online using the form on the right or call 01604 420 420.