How does bridging finance work for businesses?

Bridging Finance is a relatively new form of financing in which you can “bridge” the gap between borrowing money and paying off the loan.

For business-specific loans, a bridging loan can be a great option to cease an opportunity or grow a business during an interesting time. The loan will always be secured against a property, such as your office premises or commercial building and the provider will usually be a private lender and not a bank, giving you more flexibility on rates and terms and more open to different credit histories and backgrounds.

Why use bridging finance for business?

Typically, bridging finance is used in property-related developments to help developers purchase or renovate properties, both residential and commercial. These types of investments usually require a large lump sum payment up front. Developments of this nature have historically asked for large up front payments. Finding a company that can offer a bridging loan can jump start a project by weeks or months by accessing funds significantly quicker than an industry standard lender.

Rather than applying through a traditional bank or commercial lender, you are likely to access bridging through more challenger banks, specialist finance companies or private lenders, who will be far more flexible when it comes to the criteria and terms. Popular and well-known lenders in this space include Octagon Capital, UTB Bank, Masthaven, MT Finance and Shawbrook Bank.

When using bridging finance, it is important to always have defined a clear exit strategy while discussing and agreeing to certain terms. The owner of the business bears the responsibility to present a comprehensive repayment plan to the bridging finance company.

Is bridging finance the right decision for me?

Bridging Loans differ from other traditional loans in a number of key ways. Bridging loans are heavily favoured for short term endeavours and work very well for specific products. What sets bridging loans apart from the other methods is the sheer speed in which funds can be accessed, usually in a short number of weeks and in most cases under a month.

If you have a specific business project in mind, with a clear repayment strategy and exit plan, bridging loans can be a great option. Regular term loans may be a better option for more general commercial projects where time-frame is not such a factor.

Complications can arise during the exit strategy phase especially if the project is not meeting its scheduled milestones on time. The provider does have the ability to repossess the property in order to cover any losses they have sustained. In the unfortunate event that this happens, refinancing loans may occur under terms which are less favourable – and this is where bridging can get complicated and very costly.

What other costs do I need to consider?

When you enter into bridging finance you will most likely incur further costs to start the project. Valuation fees for the property (in the UK up to £1,000 for a basic 4 bed property), fees from brokers (around 1-2% of loan value), solicitors and general admin are all things to consider.

Late payment fees are common if repayments cannot be kept up with on time. Similarly, if you make repayments of a loan at a time earlier than agreed, this may incur an early repayment fee.

Lenders have differing levels of costs and it is always important to check the terms and conditions of your loan before you proceed.