The Basics of Bridging Finance for Small Businesses

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Bridging finance can be highly beneficial for small businesses looking to cover short-term costs. But how do bridging loans work and what kinds of SME applications are they suitable for?

What Is Bridge Financing?

Bridging finance is a short-term loan that can be used for any legal purpose. Borrowers must repay their loans no more than 6 to 18 months after they receive funding. You can use one of these loans as a stop-gap solution, where strictly temporary financial gaps need to be “bridged” at short notice.

You can generally organize a bridging loan within a few working days. Then you will need to repay the full loan balance (inclusive of all borrowing costs) in a single lump-sum payment on an agreed date.

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How Do Bridging Loans Work?

All bridging loans are secured against assets of value, typically the home or business property of the applicant. In some instances, the lender might agree to use other valuable assets such as business equipment or vehicles as security for a bridging loan.

After the lender issues the loan, interest accrues on a monthly basis, typically in the region of 0.5%. This interest is usually added to the total balance of the loan. The loan is repayable in a single lump-sum payment 6 to 18 months later.

This makes bridging finance a highly cost-effective facility, when repaid promptly.

Why Would a Small Business Use a Bridging Loan?

Small businesses often find themselves struggling with limited on-hand capital. This can make efficient cash flow management difficult. With bridging loans, SMEs can gain access to the funds they need to cover time-critical costs and finance important purchases. Then they repay the lender at a later date.

Typical applications for bridging finance in the SME arena include purchasing essential business equipment, covering staffing costs, raising money for improvements and extensions to premises, covering unexpected tax bills, and so on.

Entrepreneurs also commonly use bridging finance as affordable start-up funding for new business ventures.

What Are the Advantages of Bridging Finance?

The biggest benefit of bridging finance is the speed and simplicity with which the facility can be arranged. With all essential paperwork in place, the lender can authorize and issue bridging finance within just a few working days.

In addition, bridging finance can be comparatively simple to obtain. Eligibility is determined almost entirely on the basis of security. These are available assets to cover the costs of the loan. The lender also considers the applicant’s exit strategy, which is evidence of when and how the loan will be repaid.

Even those with poor credit or a history of bankruptcy can qualify for affordable bridging finance. Plus, borrowers do not need to make monthly repayments in the interim. This can enable smaller businesses to get better control of their on-hand capital.

What Are the Disadvantages of Bridging Financing?

On the downside, you should never seek a bridging loan as a long-term (or even mid-term) solution. Nor is it advisable to apply for bridging finance without complete confidence in your exit strategy.

Bridging loans charged at around 0.5% per month can be extremely affordable when repaid promptly. However, this low monthly interest rate could add up to a significant cost in the case where a bridging loan goes unpaid for some time.

In addition, it is not possible to qualify for bridging finance without assets of value against which the loan will be secured.

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How Can I Get a Good Deal on Bridging Finance?

The competitiveness of the loan you are offered will be influenced by a number of factors. Examples of these include the size of the loan you apply for, your credit rating, the strength of your exit strategy, and the length of the loan term.

During your initial consultation, your loan provider will present you with the options available and help you make the right decision to suit your budget.

For more information on any of the above or to discuss the potential benefits of bridging loans in more detail, contact a member of the team at Bridgingloans.co.uk today.

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