Bridge financing, often in the form of a bridge loan, is a financing option that is mostly used by property investors, developers and businesses to meet an imminent financial need until a longer term solution can be implemented. It ‘bridges the gap’ between a time when money is required, but they are expecting funds to be received at a later date, as the result of a sale, for example.
Bridge finance is offered by the likes of a bridging finance company. This type of capital is essential for fulfilling a company’s short-term financial needs. It usually takes the form of a short-term loan, like a bridge loan, that can see a company through a time of low capital until they have acquired a more secure form of capital. They can be used for a variety of reasons, including property investment and development.
How Does Bridging Finance Work?
Loans acquired as bridging finance will typically have higher interest rates than more mainstream loans, due to the risk to the lender. However, these types of loans are given on a short-term basis, typically up to twelve months, so the higher interest rates are unlikely to incur as much overall cost to the borrower than if they acquired a long-term loan at a lower interest rate.
A bridging loan will allow a business to acquire a property with just a cash or equity contribution equating to as low as 20% of the property value or purchase price. The typical advance is 70% of the value or purchase price of a property – and this includes roll-up on interest and fees over the agreed loan term. When used as a down payment on a new property, the proceeds can be used to pay off the bridge loan – including any interest and remaining balance – once the old property sells.
A bridging loan essentially removes financial obstacles and allows commercial transactions to proceed. Loans such as a mortgage, can take months to complete a deal, where as a bridging loan can be drawn up within days. Once the borrower receives the funds, they can expect to repay the loan by the end of their agreed term. Interest payments can be made in monthly instalments; otherwise, an agreement could be made with the lender to pay back everything at the end of the term – one of the reasons why bridge loans are so flexible.
Why Might Bridge Finance Be Used?
Bridge loans can be taken out by individuals and businesses that need a short-term financial solution to meet their capital needs. This kind of loan can allow people to take advantage of opportunities that arise that they may otherwise have to turn down, potentially missing out on some great business prospects. Bridge loans can also come in handy in a financial emergency.
Here are just some of the reasons why people might opt for these kinds of short-term finance solutions:
- Un-mortgageable properties – on properties that the buyer is planning to renovate where a mortgage would not be approved due to its dilapidated state.
- Securing a property – to help people purchase residential or commercial properties before selling their old one.
- Auction – for people purchasing property at auction, allowing them to complete the transaction.
- Cash flow cover – for borrowers needing a quick injection of cash.
- Renovation – for those wanting to renovate a property or develop a piece of land.
- Raising capital – bridging loans can be secured against land or property so businesses can raise the sums of money needed.
- Business obligations – for those needing funds to meet their business obligations, making payments or overcoming financial difficulties.
For most businesses, a bridge loan is used at a time when there is a temporary cash flow issue or a financial deadline. In such cases, access to bridging finance options provides a solution to rectify these problems.
The Pros and Cons of Bridge Finance
Like any kind of finance, they come with their own set of pros and cons:
- Short-term – bridge finance is typically offered over a short-term period, so you won’t be building up long-term expenditure.
- Speed – funds can be transferred into the borrower’s account in a matter of days.
- Flexible – bridge loans can be paid back before the repayment date, saving on interest repayments.
- Expensive – the interest rates on bridge loans are much higher than long-term financing options, especially if you don’t have a good credit score.
- Penalties – failure to meet repayment deadlines could result in penalties.
How to Get Bridging Finance
If you feel like bridging finance is something that is right for you, or something you would like to learn more about, you can contact us here at Ping Finance. We specialise in finding the right funding solutions for SMEs; our debt advisors are on hand to speak to you and help you find your perfect funding partner.
If you have good credit history, can demonstrate suitable experience and have a realistic exit strategy in place, there’s a good chance that we can find a funder out there for you. Even if you don’t have good credit history, there are specialised lenders out there who will overlook this; these will typically require a higher interest rate and fees.
Ping Finance take a savvy approach to sourcing finance. We bring SMEs and reputable UK lenders together, striving to find you the very best funding that your business deserves. We know that borrowing and finances can be a complicated, stressful experience; that’s why we’ve made it our mission to demystify the process. With straightforward, simple solutions and no unnecessary financial jargon, we seek to educate our users with helpful, easy-to-understand online resources to take the headache out of finding funding solutions.
You can fill out our online enquiry form in minutes to find out more about our products and services. Try it today, and one of our friendly advisors will be on hand to take you through the process. Take that first step to securing your bridging finance and finding a financial solution for your business.