There are many situations in which a business might need to source additional capital finance; the demands of modern commerce often mean that businesses are restricted by the balance of income and outgoings, and the ability to source capital from an external lender can enable a variety of profitable endeavours. Thanks to the provision of bridging finance, businesses in any industry can take advantage of the fast, flexible lending packages which can only be obtained through this specialised form of finance. In this article we’ll cover the various types of capital finance on offer and how they can be used - this will convey how useful bridging finance can be, and how it can meet the needs of various different businesses.
It’s important to bear in mind that bridging finance is designed to function as a short-term solution, not a long-term plan; bridging finance is highly flexible and fast-moving but comes with a higher price tag than longer-term solutions. It’s therefore vital to understand precisely what the terms of a bridging contract are before committing to it, and anyone considering bridging finance as a way of meeting their capital finance needs should consult a qualified financial advisor before signing on the dotted line.
Capital finance is in itself a fairly broad subject; in essence, it’s simply businesses seeking to generate cash. Many businesses have a great deal of their value tied up in assets such as equipment, vehicles and property, and while these assets are worth a lot of money, they cannot be used to pay for anything. While they can be sold, it can be detrimental to a business’s profitability; it would be foolish to suggest that a car manufacturer should seek to generate capital by selling off all its manufacturing equipment.
Capital finance bridging loans enable businesses to leverage their assets into liquid capital, gaining the best of both worlds; they obtain the capital they need to make purchases in the short term, and still retain ownership of their assets in the long term. There are three main uses for capital finance, which are outlined below:
A business that wants to re-orient itself needs money to do so, and it may not be able to raise sufficient capital through normal trading. Capital expansion finance is used to break a business out of a rut; it might need to spend more money on product development, to finance an internal reorganisation or simply to acquire new equipment. It can be hard to do so without the use of capital expansion finance, though, which injects the necessary capital into the business.
Capital expansion finance differs from other forms of lending in that the businesses making use of it are generally fairly well-established. This type of finance is designed to enable businesses to expand into new sectors or to enhance their product range, not to subsidise the startup costs of a new business.
Capital expenditure (or “capex”) is finance provided for the purchase of goods, equipment and assets that a business needs to sustain or increase profits. This is vital for growing businesses which need to secure vital trade assets, and can be used for purchases both large and small. There’s rarely a ceiling to the amount of money that bridging lenders can provide, so capital expenditure finance can be used to purchase everything from vehicles to premises, and even less tangible assets such as staff training.
Capital raising is a fairly catch-all term for businesses which need to meet ongoing expenses but don’t have the capital to do so. This can be exceptionally helpful for companies that have high overheads and risk being put into a precarious position by a temporary shortfall in their income. Many cashflow issues can cause a business to struggle, and using capital raising finance to subsidise operating expenses can be enough to maintain a business’s profitability.
Bridging finance works because it’s a form of secured finance. Because these loans are asset-backed, they can be obtained in almost unlimited quantities - the only limiting factor is the value of the assets the borrower is willing to provide. Bridging loans can be secured against almost any type of asset, too, and borrowers can turn to specialised lenders who accept all sorts of equipment, vehicles and property as security. It’s even possible for business owners to provide “second charges” against assets which are already under finance, although second charges alone aren’t usually enough to secure a large bridging loan.
The secured nature of bridging loans enables them to be provided for almost unlimited quantities of cash, but business owners must appreciate that, as with a mortgage, this entitles the lender to reclaim assets in the event of a loan going unpaid. Should the borrower fail to keep up with repayments their lender can repossess the property and sell it to recoup their money; in many cases, the lender will offer a loan extension or refinance solution as an alternative but this is still a possibility, and a reminder that no financial product should be taken on lightly.
The key to the success of bridging finance, and the reason why it’s such a powerful tool for businesses in need of capital, is the speed with which bridging finance can be obtained. While bridging lenders are still subject to strict guidelines on how they do business, they are not regulated by the FCA (unless they’re offering to lend against someone’s home). This enables bridging lenders to cut out a lot of the middlemen and paperwork associated with a mainstream loan, so that bridging loans can often be obtained in as little as a week. This means that bridging finance can be used to meet unexpected expenses, or to finance sudden growth opportunities that simply wouldn’t be possible with mainstream finance.
The speed and flexibility of bridging finance makes it an ideal choice for capital raising, capital expenditure and capital expansion purposes, and while it’s important to keep in mind the responsibilities of a bridging borrower, this form of finance can prove exceptionally powerful for businesses.
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