How To Use Bridging Finance For Your Business

Bridging finance is often associated with property deals, but it can also be a valuable tool for businesses outside the property sector. 

This type of short-term loan can provide quick funding for cash flow needs, business expansions, or resolving unexpected financial challenges. Bridging loans are typically used when other financing options are slow or unavailable.

Why Businesses Use Bridging Loans

Non-property businesses might turn to bridging finance to cover urgent expenses, such as purchasing inventory, paying suppliers, or managing operational costs during a busy period. Unlike traditional loans, bridging finance is faster to arrange and has less stringent requirements. 

For example, a manufacturing business might use a bridging loan to buy raw materials to meet a large order, repaying the loan once the customer pays.

Businesses might prefer bridging loans over traditional loans because of their flexibility. Bridging loans often do not require the detailed financial projections needed for bank loans, making them more accessible for small businesses. 

Additionally, they can be secured against assets beyond property, such as equipment or other collateral.

Typical Rates and Costs of Bridging Loans

Bridging loans are known for higher interest rates compared to traditional business loans, reflecting their short-term nature and the risk lenders take on. 

Rates for bridging loans can range from 0.5% to 2% per month, depending on the lender and the borrower’s circumstances. This means the annual cost of borrowing can range from 6% to 24%, making it essential to plan for repayment carefully.

Additional fees, such as arrangement fees (typically 1-2% of the loan amount) and exit fees, can add to the overall cost. These charges vary by lender, so businesses should compare terms to ensure transparency.

Bridging Loan Clauses to Watch For

Before agreeing to a bridging loan, business owners should carefully review the terms and conditions. Key clauses to scrutinize include repayment terms, early repayment penalties, and default fees. 

Some loans may have steep penalties for repaying early or missing payments, which can increase costs significantly.

Another important aspect is understanding the collateral requirements. For non-property businesses, securing a loan against equipment or receivables might be an option, but losing these assets due to default could severely impact operations.

Bridging Loans Versus Other Options

While traditional business loans or lines of credit might offer lower interest rates, they often take weeks or months to arrange.

Bridging loans, on the other hand, can be approved in days, making them ideal for time-sensitive situations. For instance, a business that needs immediate funds to capitalise on a limited-time deal might find a bridging loan more practical.

A study found that 30% of small businesses in the UK struggle with cash flow at least once a year, making quick access to funds crucial. Bridging loans offer a way to bridge these gaps effectively. Additionally, about 40% of businesses report challenges securing traditional bank loans, highlighting the need for alternative finance options.

Businesses considering bridging loans should work with experienced financial advisers to understand the full costs and implications. By carefully planning repayment and choosing reputable lenders, companies can use bridging finance to seize opportunities, navigate financial hurdles, and support growth without unnecessary risks.