If you are starting a new business or already have one, you must require finances to achieve your business goals. There are different finance options to give your business a boost. An option worth considering for small businesses is bridging finance which offers temporary funding to help your small business to get off the ground.
Small or medium-sized companies are crucial for the UK economy as they give 52% (£2.3 trillion) turnover to the economy. Banks do not back small companies; therefore, they often face cash flow issues. Bridging loans bridge this gap by providing quick funds, thus, aiding the growth of small businesses. Let’s explore how bridging loan can be beneficial for small-sized companies.
Bridging Finance for Business
Bridging finance for business is a sort of unregulated bridging loan used for commercial purposes. Unregulated loans for small businesses offer short-term funding at a higher interest rate.
Small business bridging finance criteria
Bridging loans for commercial purposes are offered for 1-24 months and can be granted to the following:
- Individual borrowers
- Limited companies
- Offshore companies
- Available in the UK
- Bad credit accepted
- Rates from 0.65%
- 1st and 2nd charge loans
- Loans from £50k – £10m
- Up to 70% LTV
- Terms from 1 – 24 months
- No up-front fees, no exit fees, no ERCs
How does bridging finance for your business work?
Bridging loans in the UK are secured against the property; the borrower applying for the loan for his company is supposed to put up some assets as security against the loan. This security can be of any type, most commonly in the form of a property or land. Still, businesses may use other items as security, such as valuable assets, equipment, the value of unpaid invoices, or even the equity held in your business instead of using property or land.
It is recommended to put up expensive items or property as security against a loan because the loan amount depends on the value of the security you use.
The maximum Loan to Value (LTV) offered by the lender is 75%; sometimes, it is 80%. Interest is charged on a loan, and the interest rate depends on various factors, lender, credit score, the circumstances of your business, etc. That is why start-ups or small companies may have trouble getting the loan, or they can secure it at a higher interest rate.
Typically, the interest is charged between 0.5 to 1% per month. Besides interest, other costs are also involved, such as arrangement fees, valuation fees, administrative fees, legal documentation, and the solicitor’s fees.
Bridging Finance Options
There are different bridging finance options; understanding these can help you understand which option is most befitting for your business.
Closed bridging finance
Closed bridging loans are offered for a fixed term duration. Closed bridging is more accessible as the finance providers are sure about loan repayment.
Open bridging finance
In open bridging finance, terms are flexible, and no specific term duration is set for loan repayment. Open bridging finance options can be perfect for small businesses as businesses experience uncertainty and fluctuations. Due to this uncertainty, open bridging finance is offered at a higher interest rate.
Debt bridging finance
Debt bridging finance is an ideal option for start-ups or small companies as it provides temporary cash flow to cover operational costs in a short time.
Equity bridging finance
This bridging finance option is offered in venture capital or private equity investment for equity in exchange for funds. In this scenario, a venture capital investor would supply funding for the bridging loan providers, and the provider raises equity financing. A plus point of this finance option is that interest is not mounted on loan.
Advantages of Bridging Finance for Small Companies
They can be arranged quickly as compared to traditional loans. In businesses, funds are required urgently; therefore, long-term loans would not be appropriate. Small businesses can have the following benefits from bridging finance:
- Starting a new business venture: It can be used to start a new business/project while you wait for long-term/permanent funding.
- Buying new stock: It can be an ideal option for investing in new stock.
- Business expansion: It can benefit small businesses for business expansion.
- Fulfilling cash flow requirements: Small businesses often need a cash injection for business growth. It can fulfill the instant cash flow requirements of small businesses.
- Bridging the gap between payments: It can bridge the gap between payments falling due and funds becoming available.
- Raising capital: It can help raise capital for business growth
- Bank loan/Long-term loan is declined: It can support a small company financially when banks or traditional loans let it down. Small enterprises are usually declined for bank loans because they are prone to risk.
Disadvantages of Bridging Finance
Bridging finance provides funding to the companies for a short-term duration; if you use them for the longer term, it can be expensive. They just give you support to cover the gap in finance until long-term or permanent funds are available.
Is bridging finance an ideal option for small companies?
Yes, bridging finance can be a good option for your small businesses if you are using them to bridge a gap between finances until permanent finance is available. There are pros and cons of bridging loans; it is recommended to keep them in mind and decide what is better for your company. They can undoubtedly provide financial assistance to your small company to grow.