An important part of being an entrepreneur, either in an established or new business, is the ability to take advantage of opportunities that present themselves. These can manifest in various guises; such as making a bid for those empty business premises that would be a good replacement for your current warehouse. Maybe someone is auctioning equipment in really good condition which you could pick up at a much reduced price on new; or you may want to take advantage of those significant discounts you can get when you buy stock in bulk. If a business needs to act quickly, whatever the requirement, it needs an easily accessible source of funding; a bridging loan can provide that.
A short term solution
A bridging loan is a short term lending option until a longer term solution presents itself. Because of this interest rates are set higher than those applied to more common forms of high street finance and collateral is normally required; usually a charge on property or land is taken out by the lender. In addition, repayment terms are usually shorter;
3 to 12 months generally, although that can be extended in certain circumstances.
Purpose of a bridging loan
One of the most common non-commercial uses of bridging loans is to enable a person who is moving house to
purchase a new property whilst their existing property is sold; once it is sold the bridging loan is repaid with money from the sale. Commercial bridging loans work in a similar way. Suppose you want to reap the rewards of buying stock in huge quantities to get the maximum discount available but don’t have sufficient working capital to fund the transaction; a bridging loan can be an ideal solution and is repaid as the stock is sold on to repay the loan. Providing you have told the lender what you are using the loan for, and it is legal, you can use a bridging loan for almost anything, including:
- As a source of working capital;
- Increasing cash flow;
- Preventing or stopping repossession;
- Buying property, land or goods at auction where an immediate deposit is required plus the balance, usually within 28 days;
- Property development or refurbishment; and
- Buy-to-let; a very common reason.
Obtaining a bridging loan
Whilst businesses are free to source their own bridging loan by searching the Internet for providers, or perhaps finding lenders who operate in their sector by looking in trade magazines, there may be advantages to using a broker. Brokers, look at your requirements and general circumstances, and are likely to know where the most promising options for bridging loan finance lie.
Although each bridging loan is different the basic qualification conditions are fairly standard. Applicants must usually:
- Be over 18 years of age;
- Be a UK Ltd company, Limited Liability Partnership, Ordinary Partnership, or Sole Trader;
- Have been trading at least 12 months.
Lenders will want to examine aspects of the business. This will vary from lender to lender and the repayment period and size of the loan will have a bearing. Businesses should be ready to furnish the following; not all things listed may be required and the list is not exhaustive in any case:
- Recent VAT returns;
- The profit and loss accounts;
- Details and value of the security offered for the loan;
- Banking arrangements; and
- Position with HMRC.
There are many companies operating in the market claiming to provide bridging finance. Some financiers invite applications from businesses with bad credit histories, CCJs etc. There are even suggestions of same day processing and payment. Whilst admittedly much documentation can now be submitted electronically, more cautious advice is that same day payment for a proper bridging loan is unlikely as the process it entails is more akin to a mortgage than a personal loan. Nevertheless, the bridging loan application needs to be processed and paid as soon as possible so that the business has the money it requires.
Borrowers should be absolutely clear what they are signing up for:
- What the monthly instalment payment will be;
- The rate of interest that will be applied, and whether that is fixed or variable;
- Whether there are any additional or hidden costs; and
- If there are any early repayment penalties.
Bridging loan versus bank loan
Bank loans are seldom a suitable vehicle to replace a bridging loan and particularly for small to medium sized businesses. There are a number of reasons for this: Specifically:
- Bank loans have limited availability. A recent Government report, “Improving Business Access To Finance” highlighted a huge difference between money available for funding UK business, and demand. Banks are risk averse and applications must meet strict conditions.
- Cost – Interest can be as high for a bank loan as for a bridging loan. Additionally banks are less likely to advance the full amount requested and settling for a lower amount can both leave a business still short of the money it needs, and tied into an expensive loan.
- Headlines relating to interest rates can be misleading. Whilst banks are legally obliged to publish the percentage APR this often does not reflect the full cost of the loan when hidden charges, administration and review costs are added.
- The application for a bank loan can be lengthy and would-be lenders have to navigate an obstacle course of credit checks, assessments etc.;
- Bank loans can be inflexible, a set amount is loaned for a specific period at agreed instalment rates. Failing to meet the monthly payment, in full or in part, can cause problems for businesses where cash flow can fluctuate, and missing an instalment could have severe consequences. Also, if the business is able to pay off the loan more quickly it may find it is unable to do so, or will incur heavy penalty charges or exit fees.
A final word
If a business can offer enough security, a bridging loan can be an excellent way for it to raise money urgently, with a clear plan to pay it back quickly. However, like all financing options borrowers should take professional advice to make sure that the finance they are agreeing to will meet their business objectives and they will be able to meet the terms of the loan agreement, in all circumstances.