A business’s cash flow can often be the determining factor in its success - a company that has a healthy monthly income can make confident plans for the future. This enables growth, and allows the business to develop its share of the market. However, it’s easy for a growing company’s cash flow to become obstructed, and any mismatch between outgoings and income is likely to result in a cash flow deficit. Any number of expenses can cause a shortfall in a business’s cash flow, from VAT bills to National Insurance, PAYE and even supplier non-payment, and no business owner can consistently forecast when they’ll need a little extra space in their balance sheet.
While long-term cash flow solutions such as overdrafts and revolving trade facilities are available, these forms of finance take a long time to arrange; there’s no guarantee that funds will be made available, and in the time it takes to complete an application the business may have suffered severely from its lack of capital on hand. Short term cash flow loans are therefore an excellent way for businesses to inject some much-needed capital into their accounts at short notice.
In this article we’ll highlight some of the problems that can require a business to seek cash flow finance, and the ways in which bridging loans can be used to solve these problems. It’s important to bear in mind, of course, that bridging finance is a short-term secured loan, and should not be considered a long-term financial solution; bridging loans are, as the name implies, intended to bridge the gap temporarily. Before entering into a contract, business owners should consult an experienced financial advisor to ensure that bridging finance is the right choice for them.
For some business owners, the thought of having to resort to a cash flow loan is troublesome. Businesses should always be prepared to meet their costs, is the thinking, so if a business needs to borrow money urgently this reflects a failure in their planning. However, while this may hold true for personal accounts, it doesn’t reflect the realities of modern commerce.
No matter what industry your business is in, there will always be unexpected expenses; this could come in the form of a higher-than-expected tax bill, a major customer going out of business, or the need to repair equipment. No business can successfully guard themselves against all of these costs, so it’s important to have reserves of capital on hand to meet unexpected expenses. However, this means that the business is now sinking a portion of its hard-earned income into a bank account, where it will generate a paltry interest rate. There’s no guarantee that this money will ever be needed, or that it’s an appropriate amount to meet this unknown need; you may be saving £10,000 and need only £1,000, or £50,000. In either case, this money tied up in the bank could be better spent by re-investing in the business; more marketing, more staff training, bigger and better business deals, and so on.
With this in mind, we can see that keeping capital on hand “just in case” is actually detrimental to a business, because this cash isn’t really an effective safeguard. It also has a negative impact on a business’s performance, because the opportunity cost of putting money aside is to forego any improvements to the business itself. Short term cashflow finance is therefore a valuable option for businesses which allows them to re-invest their income as and when they choose.
The main selling point of bridging lenders is the speed at which they work. While most mainstream lenders will take several weeks (or even months) to complete an application, bridging lenders will often give you a yes or no answer on the day. In many cases a bridging loan can go from application to funds becoming available in just one week, enabling businesses to act quickly when they need to. When business expenses can come out of the blue, it’s invaluable to be able to source funds in such a short space of time.
As mentioned previously, bridging finance is a form of secured lending. This means the borrower has to put up some form of security in order to guarantee the loan; most often this is in the form of property, but vehicles and equipment can also be used. Most businesses don’t actually own their own premises, and have some form of finance already in place; plenty of companies use asset finance to operate their equipment, while almost all businesses use mortgages to secure their premises. Bridging lenders can, in many cases, take these assets as security, offering a “second charge” against them. While second charges are not as secure as first charges, the smaller amounts typically required for short term cashflow loans mean that they’re often perfectly adequate.
In addition to this form of security, some FCA-accredited lenders are able to offer charges against the borrower’s personal property. These loans are only available from lenders who adhere to the FCA’s strict lending requirements, but should still be handled with great care; just as with a mortgage, bridging lenders are able to repossess the borrower’s assets if they fail to repay.
One of the most important aspects of bridging finance that makes it exceptionally useful for cash flow finance is the flexibility of bridging lenders. The terms and conditions of a bridging loan can usually be altered to meet the needs of individual borrowers, so no matter what a client’s needs are the lender can design a bespoke lending package that perfectly suits their requirements. A common option for borrowers is to “roll up” a loan’s costs until the repayment date - this keeps monthly costs down, and allows businesses to stabilise their cash flow situation without the added burden of loan repayments.
The flexibility and speed with which bridging lenders work makes this type of finance an ideal choice for businesses in need of short-term cash flow funding.
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.