Modern commerce relies heavily on financial flexibility; the ability for businesses to transfer and re-arrange their debt to minimise costs is vital for their commercial prosperity. Incurring debt is simply a part of trading for many businesses, but poorly handled debt can prove to be a burden. By restructuring and refinancing debt it’s possible for companies to minimise the impact their debt has on their trading ability and cash flow, and debt refinance is an important function of a bridging loan. Bridging finance makes an ideal solution for the challenges that face businesses with debt in need of restructuring, and in this article we’ll highlight some of the reasons why bridging loans can solve the problems of debt refinance for businesses.
While restructuring and refinancing debt can be highly desirable in some situations it’s not always the best choice; in certain circumstances there are other options that can be implemented, and while bridging loans are an exceptionally flexible method for arranging debt refinance they are not always the first choice. Before committing to any borrowing it’s important that business owners consult an experienced financial advisor - without expert help, it’s hard to know precisely what your best option is, so it’s important to seek their input.
As we’ve already discussed, debt is simply a fact of life for businesses; the demands of modern commerce are such that a business’ cash flow is often the deciding factor in its profitability, and businesses which can maintain a steady positive income are able to take advantage of new opportunities to increase their market share. It’s vital to minimise your ongoing costs as a business owner by reducing the impact that debts have on your monthly balance sheet, and taking out a bridging loan to help cover this cost can be an excellent solution.
A bridging loan is in essence a short-term financial solution; they are intended to “bridge the gap” whilst a long-term solution is put in place. This means that a bridging loan is rarely the end goal of debt refinance, especially if the debt will be ongoing; it can be fairly costly to maintain a bridging loan, so most businesses will repay them as soon as possible. While a bridging loan is not necessarily a final answer for debt refinance, it does grant businesses some time to maneuver, and when a debt could otherwise prove problematic to deal with a little breathing space can be all you need.
A good example of a problem that bridging finance can solve is the sudden calling-in of a debt; if a creditor gets into trouble, or has bills of their own to pay, they may suddenly decide to call in their loans. This puts your business in a bind; you need to repay, but with little cash on hand there’s often no option but to sell off assets in order to meet this bill. With many businesses operating in a heavily leveraged state, this sudden change in equilibrium is often enough to throw them into a downward spiral: having sold off assets to repay their debt they’re unable to operate profitably, and are eventually forced into bankruptcy.
Bridging finance presents a viable solution in this instance. Because bridging loans can be put in place exceptionally quickly (often in as little as a week) they can be used to resolve an outstanding debt swiftly and easily. While this then requires the borrower to pay interest on the loan, it doesn’t require them to sell up any of their assets.
Bridging loans fulfil a special role within the debt refinance market. There are two other options which businesses can use to restructure and repay debts as necessary, but neither can claim quite the same qualities as bridging loans can.
Unsecured Loans: It’s possible for businesses to borrow money quickly without securing it against any of their assets. These loans are secured personally, meaning that whoever takes out the loan is responsible for repaying them even if the company goes bankrupt. These loans can be obtained quickly, but because there is no security on the loan they’re often capped at a fairly low threshold, which can be limiting for businesses in need of a higher level of finance. In addition, because these loans aren’t secured against an asset they are often limited to businesses with a fairly long trading history of at least two years.
Long-term secured loans: Businesses which need to meet a big bill often turn to banks for help, because it’s these large institutions that can provide the necessary funding. However, banks are subject to intense scrutiny and have their hands tied when choosing who to lend to; they must conduct lengthy checks and interminable paperwork before agreeing to anything, which means loans take a long time to put together. While a long-term solution is usually the objective of debt refinance, it’s often not possible for businesses to wait for bank approval; by the time the bank agrees to the first loan, the business has gone bankrupt.
Bridging finance fulfils a valuable niche in between these two forms of debt refinance. While it’s still possible to take out a loan quickly, as with unsecured borrowing, it’s also possible to acquire a large amount of funding, just as with a mainstream bank lender. This enables bridging lenders to fulfil the needs of a wide variety of clients and to offer a range of solutions that meet every situation.
Bridging lenders enable commercial borrowers to quickly and easily rearrange their finances to meet shifting priorities, and this financial agility is absolutely vital in the modern marketplace. When nothing is certain, it’s important for businesses to be able to swiftly adapt to a changing environment; being tied to debt can be far more damaging to a business than the debt itself, so every business owner should be aware of the role bridging loans can play in debt refinance.
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.
Yes. They can be a great way for small, medium or even large businesses to secure a cash injection. Securing business finance from a traditional lender can be challenging as High Street lenders usually want to review a business’s past performance by way of profit and loss accounts for the preceding years. Whilst traditional lenders will put businesses through rigorous stress tests bridging lenders will focus instead on each business’s ability to repay the loan not past performance. For bridging lenders, the asset being used as security and the exit strategy are key.
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.
Business bridging loans can be an ideal solution for small, medium or large companies including sole traders, LLP partnerships and limited companies. Some specialist lenders will also lend to offshore limited companies, SPV’s and Trusts.