How companies can use bridging finance to grow their business
Companies in need of a loan to complete a deal are turning to bridging finance in increasing numbers. But what is it and when might you use it?
Bridging finance has become an extremely popular source of finance in the UK for proprietors and businesses looking to raise finance.
In 2011, around £750m was borrowed through bridging and this amount has increased five-fold to £4bn in 2016.
The fast-growth has come as the result of stricter criteria from mainstream banks and the emergence of 40 bridging lenders who have created a competitive market in the UK.
What is bridging finance?
This is a type of short-term finance used where there is a strict deadline in place. Essentially, you are bridging the gap (of finance) in order to complete the deal. The other sources of finance are unavailable or would take too long, so rather than miss out on the opportunity, you apply for a ‘bridging loan’.
The amount you can borrow typically ranges from £25,000 to as much as £25m, but because it is short term finance, the loan term is only around 3 months to 12 months (or sometimes 24 months).
The applicant must put some form of security down as part of the agreement and this is typically a commercial or residential property, or perhaps a stake in your business. Other types of security include cars, jewellery and art, although these are less common.
You are required to repay the entire loan and interest in full or you risk having your property repossessed. Borrowers have the option to repay their loans in monthly repayments, interest-only or rolling up the interest until the end of the loan term.
The loans are commonly settled upon the sale of a business or property and the borrower has received an injection of cash which they use to repay the loan.
When you would use bridging to raise money for business purposes
- Property Development: This is the most common reason for taking out a bridging loan. If a property developer has their eye on a house to do a refurbishment, for buy-to-let or sell for a higher price, they will need to raise money for the property. If there is a short deadline on the deal, they will need to raise the money fast or risk losing it. Rather than go through the traditional property chains and apply for a mortgage which would take several weeks, this is where a bridging loan can fill the gap.
- New Office: If a business owner is looking to grow his or her company and move into a new office, he or she may not have the funds to upgrade his or her premises. However, through bridging finance, it’s possible to purchase a bigger office space, using the premises as security. Then, 12 months later, when the company has expanded with new staff and has boosted its profits, it can repay the loan.
- Stock or Investment: If you have found a great stock or investment opportunity that needs an injection of cash, you can apply for finance to maximise your returns. Of course, lenders will consider the opportunity on a case-by-case basis and you will still need to put down something as collateral.
- Start-up: Maybe you have created your own start-up or have found a good opportunity. If there is a short window to capitalise, such as investing in more advertising over the Christmas period, you can get the finance to bridge the gap and then repay when you have increased your revenue.
What are the terms?
The interest rates charged by lenders range from 0.59% to 2% per month. There are additional fees to look out for such as 2% broker fees and procurement fees of up to 2.5%. If your loan involves purchasing a new property, you can also expect further costs for legal fees, surveyors and valuations.
If you decide to repay your loan early, it will be cheaper because you are paying less interest but there will typically be exit fees that apply. The industry is very well regulated by the Financial Conduct Authority and due to the laws surrounding Treating Customers Fairly, any broker that you apply with will always have to give you the cheapest deal available, which is very positive for the borrower.