What is a bridging loan?
Put simply, bridging finance can bridge a gap in cash flow. If your business is making a small loss month on month but has relatively strong cash flow, it will survive over the medium term, as long as you have available credit streams. On the other hand, poor cash flow will kill your business instantly.
Bridging finance can be borrowed against property, including buy-to-let, residential and commercial. Because of the nature of the lenders, it is a personalised service and a final decision will often be based on more than simply how much the asset is worth.
This is a short term option – therefore it is important to have an exit strategy in place. This is not a route to go down if you have constant cash flow issues, or are borrowing on ambitious sales targets. In these situations, a more traditional source of credit is likely to be more beneficial for your business.
So what can it help me with?
A lot of lenders are now coming from more diverse industries: The property developer Citu spotted an opportunity to buy an old warehouse and turn it into residential flats. Due to the state of the building, they found it difficult to get funding from a bank to buy the property and redevelop it. Therefore they acquired a bridging loan to cover the cost of buying and renovating it. Taking just over two years, the building is now a fully functioning block with flats to rent and buy.
Bridging loans can be used for other things too, such as:
- Self-development projects, such as building your own home;
- If you plan to buy at auction;
- If you are self-employed with limited income evidence and experience cash flow. problems or want to expand; and
- Buying extra stock to meet high demand.
Should I use it for cash flow?
Businesses of any sector can benefit from a bridging loan by simply using business or the director’s assets. If a company director finds that they have a lot of liquidity trapped in invoices or stock that isn’t coming to fruition for several months, they can borrow money against another asset they own. In a lot of cases this is residential property, such as buy-to-let. By freeing up equity in this way, the director can increase cash flow, pay back the bridging loan after a few months and avoid having to factor their invoices, sell their stock cheaply or release equity from elsewhere.
Due to the bespoke approach from lenders, this often works as a partnership. Companies who offer bridging loans look to ensure their loans are safe and the borrowing business is looking to ensure they pay back the loan on time. By working together, this often leads to businesses using the service again, building up long term relationships. The bridging lender will often look past bad credit history; ensuring clients are confident of their position and has the ability to repay in the allocated time frame.
Are they worth it?
Overall, bridging loans are a very useful way in which to free up equity to boost the cash flow in your business. By loaning against assets outside of your main business (such as a property), you can avoid having to factor your invoices or selling your stock at a lower cost to what you usually would. Although not ideal for every circumstance, there are now a lot more lenders in the bridging market, making the industry more competitive and allowing better rates of interest.
Jonathan Dempster is an economics graduate writing on behalf of Balmoral Bridging.