Bridging finance is an alternative finance that has gained popularity in recent years. It enables companies to raise money or make urgent purchases within a tight timeframe and repay the loan within 3 to 24 months. Unlike traditional bank loans, which can take several months to secure, bridging finance can be obtained in weeks by working directly with a private individual or company. This form of specialist finance gained popularity during the 2008 financial crisis when banks became more selective with their lending practices. Since then, the industry has grown significantly, with the current value estimated at £7 billion, a considerable increase from the £1 billion reported in 2011.
In this article, we will explore how companies can use bridging finance to raise money.
How Bridging Finance Works
A bridging loan is a short-term loan used to bridge a funding gap. It is typically used to cover expenses that arise before long-term funding is secured. Bridging finance differs from traditional loans in several ways. For example, it is usually quicker to obtain, and the repayment terms are much shorter. Several types of bridging finance are available, including open and closed bridging loans, commercial and residential bridging loans, development finance, and auction finance. These types of loans are typically secured against assets such as property.
Why Companies Might Need Bridging Finance
Bridging finance is often utilised by companies that need to raise funds within a tight timeframe, such as property developers looking to purchase a property under a strict deadline. Instead of going through the lengthy process and obstacles of obtaining a traditional mortgage, companies can secure funds to purchase commercial or residential property within 2 to 4 weeks, with loan amounts ranging from £50,000 to £25 million.
To secure a bridging loan, companies must have valuable collateral or assets to use as security. This type of finance can also be utilised by businesses seeking to grow or invest in their operations, using assets such as office premises, vehicles, or equipment as collateral.
You may find numerous examples of companies taking out bridging loans to overcome emergency financial needs. For example, Thomas Cook’s Condor secured a €380 million bridging loan in 2019 against their airlines, and TUI obtained bridging finance worth €1.8 billion in 2020. In both cases, the loans were short-term and secured against valuable collateral to obtain approval.
What Are The Terms To Secure A Bridging Loan?
Bridging finance is typically secured against some form of collateral, often a property. The loan term for bridging finance is typically 3 to 24 months, and failure to keep up with repayments could result in the repossession of the property or asset used as collateral.
As some building projects or business deals can be lengthy, it is common for a bridging loan to expire and for the borrower to refinance under different terms upon completion. The monthly interest is charged on a bridging loan, with the option to roll up all repayments until the end of the loan term. At this point, it is expected that the borrower will have completed the project or seen a significant increase in revenue to help pay off the loan. For example, a property may have been renovated and sold on the open market or refinanced to be rented out to tenants.
Advantages of Bridging Finance for Companies
There are several advantages to using bridging finance for companies. Firstly, the approval process is usually quick, meaning the funds can be accessed in days rather than weeks or months. Secondly, loan terms are flexible, allowing companies to tailor the loan to their needs. Bridging loans UK also allow companies to access larger amounts of money than traditional lending methods, and the commitment period is short-term, usually lasting no more than 12 months.
Risks and Challenges Associated with Bridging Finance
While there are many benefits of using bridging finance, there are also risks and challenges that companies need to be aware of. Firstly, the interest rates on bridging finance loans are typically higher than traditional loans, and it can make them more expensive in the long run. Secondly, there is a risk of default, which can lead to the loss of assets. Bridging lenders may also ask you to provide collateral to secure the loan, which can be challenging for some businesses.
How to Access Bridging Finance
If a company is interested in accessing bridging finance, there are several steps it can take. Firstly, they can work with a financial advisor to help them identify the best options for their needs. They can also approach bridging finance providers directly to explore their options. Companies must prepare the necessary documents, including a business plan and financial statements, and meet eligibility criteria, such as solid credit history.
Are Bridging Loans Regulated?
Bridging finance is subject to regulation by the Financial Conduct Authority. Various rules are in place to prevent individuals from borrowing against their primary residence, which could put their homes at risk.
If you apply for a bridging loan through a broker, they should provide you with the lowest rate possible based on your deal and circumstances.
Bridging finance can be an effective way for companies to raise money quickly and efficiently. However, it is important to consider the risks and challenges associated with this type of finance. Companies must carefully evaluate their options and work with a trusted advisor to ensure they make the right business decision. By doing so, they can access the funds they need to move forward and achieve their goals.