Whatever business you’re running, there are times when you may need immediate access to a significant capital sum. Whether that be for the purchase of a major asset or the equipping of production lines.
Bridging Finance
Those are circumstances in which you might want to consider bridging finance. So-called because it typically bridges the gap between your immediate need for capital and a longer-term solution.
The short-term nature of bridging finance was highlighted by accountants Ernst and Young (EY). They revealed that the average term of such borrowing is 11 months – within a range of between two weeks and three years.
How bridging finance may help your immediate needs
When you have decided on a major capital investment, a significant sum is likely to be involved. And often, it’s needed quickly. You might have found the ideal premises in which to establish new company headquarters. But the market is highly competitive with many rival bids for the same property. You may be hamstrung by the fact that sizeable, long-term finance – such as a mortgage – can take a long time to arrange. So long, that you miss the chance to buy the ideal premises.
Bridging finance has the advantage in those circumstances of being arranged as quickly as 14 days – or even less.
Typically, you may not need to make monthly repayments on your bridging loan. Although repayment of both the capital and interest is covered by other assets pledged as security. And this may help in circumstances where your cash flow is already under financial pressure.
Thanks to competition in the marketplace for bridging finance, interest rates are competitively priced. Although you should expect to pay a higher rate of interest than on a long-term mortgage.
If the property or major assets you intend to buy are being sold for somewhat less than their full market value, you may still be able to arrange bridging finance for the full value. Effectively covering any deposit involved in the purchase.
As far as property is concerned, bridging finance may be available where a conventional mortgage is not. For example, if you’re buying a derelict or semi-derelict property to refurbish, modernise and subsequently put to business use.
The Need to be Careful
Bridging finance is almost certain to be a more expensive borrowing method than long-term finance. So, it’s important that you take into account the full cost of borrowing before taking on the commitment of short-term bridging finance.
Some bridging loans may be very short-term. The short-term nature of the borrowing and the need to make full and final repayment at the end of the term needs to be closely monitored and managed. Ensuring that you are certain of meeting the deadline. If you fail to make the repayment, the asset or assets which you pledged as security may be repossessed by the lender and cause you further problems.