A business bridging loan is a type of short-term commercial loan commonly used to ‘bridge the gap’ in finding a permanent source of finance for businesses such as limited companies (LTDs). This particular source of finance is typically used by businesses that have immediate cash flow issues and need to raise finance quickly.
This article aims to give you a general overview of how bridging loans can be applied to businesses, and whether a bridging loan is the most appropriate choice in certain circumstances.
What can a business bridging loan be used for?
Business bridging financing can be used for a variety of business-related goals, including but not limited to:
- Commercial property purchases
- Business cash flow and working capital
- Refinancing of existing commercial property
- Redeem existing business loan, or charge on asset(s)
- Investment opportunity
- Other business debt consolidation
- HMRC payments (Corporation Tax, VAT, PAYE, etc)
- Contract fulfilment
- Business expansion & new enterprises
- Portfolio purchases
- Stock/plant/machinery purchases
- Business acquisitions
The typical loan term of a business bridging loan is between 3 - 24 months but can be repaid earlier, usually without early repayment charges, although this varies from lender to lender.
Who is eligible for business bridging finance?
Any entity that is commercially incorporated can apply for a bridging loan, this includes startups, SMEs, large corporations, and real estate investors using a special purpose vehicle such as a limited company.
The criteria for obtaining bridging finance will largely depend on how you intend to secure the debt. If your intended security is in the form of a 1st charge on a commercial property, and there is enough equity in that property to satisfy the loan-to-value requirements of the lender, the process is relatively straightforward and quick to complete.
Stephen Clark, from Finbri Bridging Loans, comments, “Most business-related bridging loans in the UK are secured against commercial property or a portfolio of properties. Without owning any property or land it's unlikely that a UK lender will consider financing a company.”
However, you may also be able to use alternative forms of security and in these instances, more documentation supporting the loan application may be required, such as a robust business plan, cash flow forecasts, etc.
Aside from commercial property, you could in theory use the following as security for the commercial bridging finance facility:
- Agricultural land and buildings
- Livestock
- Plant and machinery
- Classic cars
In addition to the security and exit strategy, you’ll also likely need to supply the following: credit history, company annual accounts, proof of identity, and a statement of assets and liabilities.
Typically, the larger the commercial bridge loan application the more due diligence is required to satisfy the lender and the longer this takes.
What are the types of business bridging loans?
Two interest options available to businesses are typically rolled-up and serviced.
Rolled up: Also known as capitalised interest, payment in kind (PIK), or retained interest. The lender will advance the interest to the borrower in addition to the loan amount. This is standard practice in the UK for bridging loans and property development finance, where the security does not generate revenue. The interest is not paid monthly or during the term of the loan but instead, added to the outstanding principal loan amount (hence the phrase "rolled up"). As the borrower draws the net loan down, either in one lump for a bridging loan or several tranches for development finance, the interest that would then be accrued over the agreed loan term is then retained by the lender rather than serviced by the borrower. At the end of the term, the borrower would repay the gross loan which includes the interest by way of either refinancing or selling the asset.
Serviced: This has similarities to a traditional mortgage loan, where the interest is due every month. Therefore, there is no interest payment required at the end of the term and it is not compounded, so it is effectively a cheaper option of finance.
What are the benefits and risks of using a business bridging loan?
The main advantage of using business bridging finance is that it can quickly provide the required funds, typically within 3 days to 3 weeks, and is literally designed to bridge the gap of any short-term financing need.
- A benefit of this type of loan is that it can be used for many purposes, as it is incredibly flexible.
- The terms are relatively short, typically no longer than 12 months.
- The terms can be flexible incorporating features such as no early repayment charges.
As with any other loan, there are some risks associated with this type of loan. This includes;
- The business may not be able to repay the debt in time, which could lead to defaulting on the loan. This could have several consequences, such as additional fees, damage to the business’s credit score, and the possibility of property repossession.
- The interest rates on business bridging loans are typically higher than other types of loans, so the company will need to be prepared to make higher repayments than traditional financing options.
Are there any alternative options to bridging finance?
Commercial finance comes in a variety of forms and what the borrower chooses will depend on their exact situation. If the borrower is an experienced property developer then a bridging finance, whilst useful, is not the only option available. Financing could encompass debt-based finance, which includes bridging loans, equity financing, or a mixture of both. Here’s a selection of the most common when it comes to property development in the UK.
Typically, there are several factors that determine the development finance options available to the borrower. For example, if there is already existing bridging or development finance on the asset that is to be used as security this will limit the options of further financing. Equally the risk profile of the project may influence the finance options available. For example, debt financing has a higher likelihood of approval due to the lower-risk profile, this typically includes a 1st or 2nd charge asset secured loan.
Whilst there are many subtle differences between bridging finance and development finance, the primary one is that a bridging loan is paid out in a single lump sum, whereas development finance is paid out over tranches. As development finance is often a higher value of financing, developers aim to reduce their interest costs by only borrowing the absolute minimum to progress in line with the build schedule. By drawing the funds in stages the borrower limits the interest paid.
As the level of risk and costs increase the financing options become more nuanced and therefore more limited. An example of this includes joint-venture financing. Joint venture financing involves the lender investing into the project and protects their investment by becoming a shareholder, usually in a special purpose vehicle (SPV) such as a limited company. The lender may want to take preferred equity in the SPV, receiving a preference over common shareholders with respect to the payment of dividends or, in the case where the project fails, the ownership of liquidated assets.
What are some things to consider before taking out a business bridging loan?
Before taking out a business bridging loan, it’s important to consider some key points. Businesses should make sure that they are able to repay the debt in a timely manner. It’s also important to be aware of the interest rates associated with this type of loan, as they are typically higher than traditional loans.
Businesses should also speak to a financial advisor to get a better understanding of their options and what would be best for their company. Advisors can help assess the business’s current financial situation and offer other options that may be more suitable for the business.
- How much finance is required?
- What are the funds intended for?
- How long is the loan required?
- What are the repayment terms?
- What interest rates are being offered, rolled up, or serviced?
- What are the fees for obtaining the loan such as product fees, arrangement fees, valuation fees, survey fees, solicitor fees, accountancy fees, etc)
- Is an alternative form of financing more appropriate in your specific situation?
Final thoughts..
A business bridging loan can quickly provide the required funds for a short-term financing need. However, it is important to consider the risks associated with this type of loan before taking one out. Businesses should speak to a financial advisor to assess their options and find the best solution for their company and individual circumstances.
