If you find yourself wondering what is bridge financing, then you’re in the right place. Bridging loans essentially provide exactly what their name suggests – a bridge. When a business is struggling or is in need of a cash injection, these loans are available to help bridge the financial gap between a payment due and their next flow of income. Generally, they are used for property matters, whether for the purchase of property at auction or the renovation or development of a property by a landlord or property developer. Anytime money is needed quickly, and for a short period of time, a bridging loan can help.
For this reason, bridging loans are typically only a short-term loan type, usually only for the period of time between needing the money and making back what is owed through the selling or renting out of a property in the future. However, due to their short-term nature, they can typically come with high rates of interest despite mostly being a secured loan type. You may face high APR with some lenders, as well as having to offer up a security, but this is manageable if payments are met on time and in full after you and your business receive the necessary income.
What Is Bridge Finance Used For?
Typically, bridging loans are aimed at landlords and property developers in need of cash between the buying and selling of a property. This money can be used to invest in a property, whether for renovation or purchase and is designed to be paid back when the money is made up after the gap has been ‘bridged’. Bridging loans offer straightforward lending options for both amateur and professional developers and landlords when the money is needed most.
However, despite being designed with property in mind, these loans are often being adopted to bridge any financial gap, often between applying for a longer-term loan and being accepted for one. Whether for commercial mortgages or another form of long-term loan in business, bridging loans can provide the cash injection needed but do come with risks.
As bridging loans often require some form of security or collateral, often in the form of your home or business or personal effects, it’s best to be sure that your longer-term finance option is guaranteed. This isn’t possible with mortgages – there’s no guarantee that your commercial mortgage will be accepted and for this reason, you should always be sure you can afford to pay back a bridging loan if things fall through.
The Benefits Of Bridge Finance
Now that we’ve answered the question what is bridging finance, understanding the benefits can better help you decide whether this is the right finance option for you and your business. While commercial mortgages are another option for those looking to make property investments, the shorter-term option of a bridging loan could prove more beneficial – here’s why.
Applications for bridging loans tend to be simple and are accepted much more quickly than a long-term mortgage. In fact, this can be done in a few days in some cases, as opposed to weeks or more as you may face with a traditional bank business loan. This quick and short-term option is not only taken out quickly as and when you need it but repaid just as quickly in most cases.
Unlike bank loans, bridging lenders are more inclined to accept applications for any reason for lending. In fact, you may find that very few questions, if any, are actually asked regarding the intention for the money. In the case of bridging loans, they are typically designed for property-related purposes, but can be used to bridge financial gaps between applying and receiving long-term loans, and even through periods of monetary lulls during business development.
While not every lender will be flexible with their repayment periods, most lenders are much more flexible when it comes to the duration and amount you’re looking to repay. It’s important to note that you will need to meet the agreed repayment schedules regardless, but in most cases, this is typically flexible when deciding this schedule in the first place.
While interest rates can be high in some cases, the short-term nature of the loans means that this often balances itself out and can be much more affordable than longer-term mortgages and loans. You won’t need to worry about ongoing payments or long-term monetary commitments and as a result, bridging loans can be an affordable loan alternative.
The Drawbacks Of Bridge Finance
When it comes to applying for a bridging loan, understanding what the potential risks and drawbacks are can either help you prepare for your application or decide whether this is the right loan type for your situation and your company. Here are three of the main drawbacks:
The interest rates associated with bridging loans can seem high and will cause money to build up if repayments aren’t met on time. If kept under control and paid back, however, this won’t become an issue but the risks associated with needing to secure long-term finance to repay them must be taken into account. If you can’t afford to pay back the loan within the given time frame, there may be an alternative loan to suit your situation better.
Bridging loans are often a type of secured finance, meaning that you will need to provide a security or collateral before being accepted for the loan. This could be anything from your personal home and effects to your business premises and equipment and of course, this poses a risk in and of itself due to the fact that defaulting on the loan could lead to you lose these assets.
It Can Be Easy To Default
Bridging loans are unfortunately easy to default on if not handled with care. Bridging loans are often taken out to bridge a gap until a longer term financial solution is available and if this solution doesn’t happen, defaulting on the loan is a risk any business could face.
So, what is bridge financing? Bridging loans are a useful way for businesses to gain the cash injection needed to bridge the gap until a longer term financial solution is available. Whether applying for commercial mortgages or looking for money to cover a property development until the building can be sold on or rented out. They often come in secured format, meaning that you’ll need to provide collateral as a security. While interest rates can be relatively high in terms of APR, as a short-term finance option to bridge a gap, they provide a quick and simple repayment option that remains affordable if payments are met.
While there are risks that must be taken into account, bridging loans are an effective loan option for businesses seeking temporary finance. If you’d like more information on ‘what is bridge financing?’ or would like to apply for a bridging loan, get in touch or fill in our application form, today.