In the current world market, bridging loans have become a very popular option for the small business seeking to free capital in order to advance the company. Used well, this type of loan is very effective and efficient and allows a business the freedom to grow in almost any economic conditions and without great sacrifice. Knowing when a bridging loan is the right option, however, is difficult.
Business Bridging Loans for my Business?
Bridging Loan Defined
Referred to as a bridging loan in the UK, this type of short-term loan is also known as a bridge loan, a caveat loan and, in some scenarios, a swing loan. The term of a bridging loan is usually very short, often just weeks or months, but some can extend as far as several years. In this context, the term bridge/bridging refers to notion of interim financing. Interim financing is either a means to free capital or intermediary financing used prior to a larger, more permanent financing agreement being reached.
What are Bridging Loans Used For?
Bridging loans are used to take advantage of short-term opportunities. For instance, commercial real estate often requires fast closure, and a bridge loan allows that to happen in a way that traditional financing cannot. A common residential real estate scenario is someone building their own home and using a bridging loan to do so before finalizing the actual mortgage. Companies and individuals also use bridge loans to buy stock, make auction purchases and facilitate self-employment.
Bridging Loans as Cash Flow
Businesses also use bridging loans for cash flow because the interest is cheaper than the short- and long-term costs of liquidating assets to free capital. Lenders tend to provide bridging loans easily, quickly and with low interest rates because there is usually very little risk for their institution. When a business has established a relationship with a financial institution, bridging loans can even be available in an automated fashion, almost like a line of credit.
Bridging Loan Pros
• Short term
• Low interest rates and fees
• Repayment flexibility
• Great credit rating benefits
• Easier eligibility
• Provide access to longer-term loans
Bridging Loan Cons
• Fast repayment required
• Larger payments
• Bigger penalties
• Faster interest accrual
• Less lender flexibility
• May be based on future financing
• Can devastate a credit rating
Are Bridging Loans Worth It?
As with all matters of financing, whether or not a bridging loan is worth depends entirely on economic factors and the circumstances of the individual/business.
Consider a retail shop that has a great deal of capital tied up in inventory in preparation for the holidays. In this scenario, a bridging loan is absolutely worth it because the principal is covered by the inventory and the interest will be covered by the holiday profits.
Now, consider a contractor that is considering a bridging loan to start a development project that will require further financing in order to be completed. In this scenario, a bridging loan is likely not worth it because if the future financing falls through, the contractor will be in a very bad financial situation.
Are Bridging Loans Right for My Business?
In order to determine whether a bridging loan is right for your business, you must first determine the amount of risk that is associated with the venture that the bridge loan will be applied to. Bridge loans are only a practical option in scenarios where there is very little risk. For instance, a freelancer that has secured his/her first contract could use a bridging loan to facilitate completion of the job. However, that same freelancer should not use a bridging loan in order to facilitate the acquisition of that project.
Greenfield Capital Bridging Loans
Call our free help line on 0800 779 7097 to speak with one of our experienced Relationship Managers, who will guide you through the simple bridging loan process and answer any of your questions.