In modern business, the ability to move quickly and adapt to changing circumstances is vital. Without the capacity for restructuring and expanding quickly, many businesses would struggle to grow to their full potential, which is why it’s so vital for businesses to have access to fast, flexible sources of finance. Bridging loans are a highly flexible form of finance which can be used in many situations, and which often provides an ideal solution for businesses which need access to funding in a short space of time.
In this article we’ll discuss what makes bridging loans such a great fit for the needs of modern commerce, and how it can be used to satisfy many different requirements. A thorough understanding of how bridging finance works is essential for anyone considering applying for this form of finance, and it’s vital that potential borrowers consult their financial advisor before pursuing a bridging loan.
To understand why bridging loans can be so vital to healthy businesses, we first need to understand what the demands of a growing business are. Companies are constrained by their current finances, and although they may hold some capital on hand for running costs it’s unlikely that they will have much in the bank at any given time. This is because a growing business will always seek to grow as large as its cash flow will allow; there’s no sense in accruing capital simply for the sake of it, and clever business owners constantly re-invest profits in order to keep the business booming. However, this means that few companies have the funds on hand to make large purchases, and during any expansion there are bound to be several large capital expenditures.
A small business might begin expanding by enlarging their current operations; buying new equipment and premises, for example, or investing in upgrades to their existing assets. There comes a time, however, when it becomes more economically viable to simply buy up existing businesses rather than expand your own; rather than re-training staff and setting up specialised facilities, these can all be bought “ready-made” by acquiring a competitor (not to mention increasing the original company’s market share). The wholesale acquisition of an entire company is no small task, however, and requires a substantial input of capital, and as previously mentioned capital is something that many growing businesses are likely to be short of.
Generating an injection of capital is usually a long task; banks are very reluctant to finance commercial expansion without extensive valuation and cross-checking. While it’s important to ensure security and stability with any loan, the lengthy process which banks put applicants through is likely to take several months. This presents a problem, as few businesses have months to spare; they’re trying to grow quickly and build market share, and several months of downtime is counter-productive. What’s needed is a short-term loan to “bridge the gap”, so that the acquisition can proceed immediately while a long-term funding solution is arranged. This is what gives bridging finance it’s name, and what makes it such a powerful and vital tool for businesses looking to expand.
A typical acquisition might require several million pounds to achieve, and take a good few months to resolve. The terms of bridging loans are ideally suited to these requirements, and specialised bridging lenders who deal in acquisition finance are able to provide loans in excess of £10 million (some of the largest lenders will be able to secure funding in the hundreds of millions of pounds, so there is no real limit to the amount that can be borrowed). The term of a bridging loan can also be variable, and though most lenders offer loans with terms as little as one month, acquisition finance is also commonly available for much longer durations (up to 24 months in some circumstances). This is usually much more than enough, as many acquisitions will not require this much time to resolve. The option to extend the loan is valuable, though, and gives businesses more breathing room.
The sheer speed at which bridging finance may be arranged is what often makes it an attractive option. Though banks and more traditional forms of finance usually take weeks or months to provide funds, a typical bridging lender won’t take much more than a single week to make funds available. This is partly thanks to the fact that many bridging lenders are principal lenders (in that they have direct control over the money they lend), and so are able to approve loans with the minimum of red tape.
Because a bridging loan may be secured so quickly it is an important part of an expanding business’s financial strategy. In many cases, an acquisition can’t really start happening until money changes hands, so the capability to quickly get the ball rolling with a bridging loan is incredibly useful. In addition, the versatility of bridging finance means it can be secured against a wide variety of different assets, which is vital for many fast-growing businesses.
As mentioned previously, bridging loans are a form of secured finance, which means that they give the lender the right to repossess and sell the borrower’s assets if they should fail to repay. These loans are often secured as a “first charge” against property or equipment, which means that the lender is entitled to take priority over other lenders if repossession is necessary. However, in many cases an expanding business is unable to provide a first charge, since all of their assets are under finance already; in these situations a “second charge” must be sought. Because this makes it harder for the lender to recover their money in the event that the borrower fails to repay (because the lender will be second in line), loans secured in this way are often more expensive. However, specialist providers of acquisition bridging loans are highly flexible, and are able to tailor their products to meet the needs of their clients.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
A business bridging loan can be used for a huge variety of different purposes. Most commonly they are used for major purchases such as property, for new equipment and machinery as well as to acquire stock. They can also be used as working capital and by new businesses that require a cash flow injection.
A vast majority of businesses will use property or land as security when taking out a bridging loan. There are however a small number of specialist lenders that are prepared to secure bridging loans against equipment, the value of unpaid invoices and projected future sales or even against equity in the business.
With a huge variety of lenders to choose from in today’s market pretty much all types of commercial property will be acceptable including commercial units, mixed use properties, offices, care homes, leisure complexes, farms, retail units, restaurants, pubs, land with or without planning permission and much, much more beside. Business bridging loans are also ideal for commercial property in a poor state of repair, non-standard construction property and once again much more besides.
Yes. Absolutely. They can be very useful in both the above instances and to solve a variety of other problems.