The rockiest part of any business’s lifecycle is when it’s just starting out; before a wide customer base can be established and long-term finances put in place, businesses are invariably in a precarious situation. A fresh business needs a stable source of finance in order to establish itself within the market, and bridging finance provides an ideal solution in this scenario. The flexibility and unparalleled adaptability inherent to bridging finance makes it a reliable answer to many of the problems that startups face, and bridging loans for new business finance can often be an invaluable component of an early finance plan.
Bridging loans are unique amongst financial products in that they’re well-suited to many different purposes. While term loans and other long-term financial options enable businesses to access funding over a long period of time, bridging finance promotes flexibility and responsiveness within a business. Bridging loans differ from other forms of loan in that they’re designed to address one particular need or project, rather than acting as a catch-all financial backup; a bridging loan will be used to complete a specific purchase or inject the capital necessary to complete an order. Because of this, bridging loans can be an important component of any new business’s finance strategy.
In this guide we’ll highlight some of the ways in which bridging loans work for new businesses, and some of the reasons why businesses turn to bridging finance. Bear in mind that bridging loans are a specialised tool and are not always appropriate in every situation; business owners should be sure to consult a financial advisor before committing to any financial product, and bridging loans are no different.
A new business will typically need to source a large amount of capital before it begins trading. This can be achieved through many different avenues by raising funds directly or through loans and debentures, and some businesses even go so far as to crowd-fund their startup costs. However it can be very difficult to raise the necessary funds through these methods as they’re not secured against assets; this means that the startup business is essentially trading on its (and its owner’s) reputation, which therefore limits the capital it can obtain.
When purchases need to be made, though, businesses have to kick-start the process; a business that’s underfunded won’t be able to trade at its full potential, and is shooting itself in the foot before even beginning the race. Bridging finance can help to “fill in the gaps” in a new business’s finances to ensure that it can purchase what it needs, when it needs it.
Bridging finance is an exceptionally flexible form of lending which can be turned to almost any purpose. As a form of secured finance, bridging loans are asset-backed; the borrower gives the lender a “charge” against their assets, which they can use as a guarantee to get their money back. Because of this added security bridging loans can be obtained for significant sums of money, unlike with unsecured lending which is typically capped at a relatively low threshold. The amount that can be borrowed correlates to the value of the asset used as security, and the most common asset is property.
Generally speaking, most bridging lenders only take out charges against commercial property or assets - they’re not subject to Financial Conduct Authority (FCA) regulation, which gives them more control over how their loans are structured. This means that borrowers will need to secure any loans against a commercial asset such as the business’s premises or equipment. Plenty of bridging lenders specialise in different areas of industry, so borrowers in fields as diverse as private aircraft hire to heavy machinery construction can find an experienced lender that can work to their needs.
Some lenders are FCA-certified, and as such are able to offer loans secured against domestic property. Because any loan secured on the borrower’s home is seen as a type of mortgage these lenders must adhere to the FCA’s strict regulations on terms and conditions. It can be more expensive to take out a bridging loan secured on a residential property because these homes are often already under finance; if there is still an existing mortgage on the property then the mortgage provider will have first claim if the home is repossessed. Because the bridging lender is second in line this is known as a “second charge”, which usually restricts the amount that can be borrowed. However, borrowing through a second charge can enable business owners to generate a little extra capital, which can be exceptionally useful in the first years of a business’s development.
An important consideration for bridging borrowers is the method through which they’ll repay their loan. Bridging loans come in two distinct variations, “open” and “closed”; a closed loan has a predetermined repayment date, while an open loan does not. In either case, the borrower will need to know how they’re going to pay back the money they borrowed. A typical exit strategy is the refinancing of a bridging loan with another form of loan - a new business might well be able to obtain a more long-term funding solution after a few months, which can be used to pay the bridging loan off. Alternatively, the business might prove so profitable that it can simply pay the loan off with capital.
An important bonus for new business borrowers is the ability to defer payment of a bridging loan until a specified date - by “rolling up” interest costs and arrangement fees the borrower can opt out of any monthly payments. This can be very valuable for a new business which needs as much space as possible in the bottom line. The ability for businesses to borrow and repay flexibly and to source finances for almost any purpose makes bridging loans an ideal fit for the challenges of new business, and demonstrates why bridging lenders can provide the perfect solution for startup finance.
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