Could bridging finance provide the right short-term funding option for your micro business?
Bridging finance is always going to be relatively niche, but it’s a form of business funding that has really taken off in recent years.
Reflecting this, in 2015 we saw a 17 per cent increase in bridging loans being taken out for business purposes relative to 2014. That’s a pretty noticeable increase.
Below well look at three examples of how bridging loans were used by micro business owners last year, but before we do that here’s a basic explanation of what they are and how they are used.
A bridging loan is a short-term loan, typically of between one and 12 months, which is used to provide the borrower with a temporary cash injection something to get them from Point A to Point B (hence the term bridge?). Bridging loans, or bridges, tend to start from 50, 000 and go up to 50m or more.
Well be focusing on business scenarios in this article, but one of the most common uses of the bridging loan is when someone finds a property they really want to buy but havent yet sold their own home. The bridging loan enables them to purchase their new home and, when they have sold the original property, they then pay off the bridging loan.
A bridging loan is always secured against a residential or commercial property the ‘security. Importantly, there should always be what’s called an exit strategy? in place in other words, a way for the borrower to pay off the bridging loan as it’s only ever a temporary solution. In the case above, for example, the exit? was the sale of the original property.
it’s worth pointing out that, because bridging loans are generally arranged in rapid timescales and are normally only required for a short period, their headline interest rates are typically higher than a bank loan. But since these loans are usually paid off within several months, the amount of interest actually paid isnt necessarily that high.
Bridging uses for business owners
So how are micro businesses using bridging loans? To explain this, below are three real-life examples:
A client who had already exited a business and paid off her mortgage, had an idea for a new company and wanted to get it up-and-running quickly. She planned to take out a new small mortgage on her property to create the initial seed capital for her idea but was aware that this might take 1-2 months. As she wanted to get the business up-and-running as soon as possible (she had the classic FOMO [fear of missing out] typical of entrepreneurs), she took out a bridging loan for 210, 000 secured against her property. The funds were in her bank account in just over a week and she was able to proceed with setting up her new venture. Once she had arranged the mortgage, she paid off the bridging loan in full.
The owner of a rapidly growing brewery wanted to renovate a large run-down property on some land he had acquired with a view to selling it on. As he owned the brewery outright, he was able to take out a bridging loan for 450, 000 to fund the extensive renovation, using the brewery as a security. He will pay off the bridging loan when the the property is sold. The renovations, estimated to take six months, are due to be completed in the spring after which the property will go on the market.
The owner of a startup providing financial software to investment banks and hedge funds had a temporary cash flow problem when a large client had IT issues and was unable to make its payment on time. Needing to pay staff and own suppliers, the owner took out a bridging loan of 125, 000 secured against his residential property, which he then paid off six weeks later when the client eventually paid its outstanding invoice.
Solving everyday business problems
Hopefully, the three examples provided above will help you understand how bridging finance can be used in a business context, whether that’s dealing with a cash flow problem or finding the funds to launch.
As the CEO of the British Business Bank, Keith Morgan is responsible for crucial business funding initiatives such as Start Up Loans and the Angel CoFund. As Business Advice found out, he has big plans for opening up the finance market. more»