Bridging loans can be a Godsend for companies that need short term money to complete a project or provide quick working capital.
When will a business need a bridging loan?
The obvious example is when buying a property. It can be the case that a target property is found but that completion is set in advance of selling another to finance it.
In this case, the buyer has the option to let their perfect place go or to put some form of short term borrowing in place because having ready cash available can often be the difference between getting a bargain and seeing it slip away. This is especially true in the case of buying distressed businesses or assets from liquidators.
Importers often must purchase large lots to make a transaction and subsequent transport worthwhile. This will usually mean being able to pay cash up front for goods that may be sold much later. In this case the company will need to find a way to finance a deal.
Companies that need to find a large amount of cash quickly and with flexible repayment terms often look for bridging loans.
A bridging loan is, as the term implies a method of bridging the gap between money going out and cash coming back in.
Typically, the loan will feature some form of security such as a charge on a property and the cost of the loan and the availability of finance will depend heavily on the quality of the security offered.
A bridging loan will be offered for a short to medium term with the average length being around the seven-month mark, but they will also often have flexible payment terms meaning that if the cash is received quicker than expected then the borrower can pay back the bridging finance early.
Make no mistake, bridging finance is purely short term borrowing as the interest costs will be high, so the borrower really needs to do their sums. Will the interest paid negate the profit or savings achieved by moving quickly?
What things should you look for in a bridging loan?
The first thing to look for is the cost. What will the interest rate be?
Secondly look at what Loan to Value (LTV) is achievable. So if you have say £100,000 of security to offer and the lender is offering 60% LTV that means you will be able to draw £60,000. Will this be enough?
Look for lenders that will offer flexible repayment terms and allow partial repayments, especially if you are funding cashflow that may allow you to pay down the borrowing in part.
Also check out upfront fees and payments. Some lenders will charge quite high fees, some will charge none so shop around.
As we have already seen speedy availability of funds is important if you are to snag that awesome bargain so look for a lender that can offer quick pay outs and as little in the way of paperwork as possible.
If you need quick cash to make the most of a business opportunity or get you through a short term cashflow issue, then bridging may be right for you.