Small Business Bridging Loans

Bridging loans for small businesses explained

What is a bridging loan?

A bridging loan is a short-term type of finance which is secured against property, in much the same way as a mortgage or secured loan.

Being short term, interest rates are usually higher when compared to a mortgage, however the flexibility often outweighs the higher costs.

How do they work?

Bridging loans are usually offered for a maximum term of 18 months, although some lenders will offer longer. If the loan is secured by first legal charge against your home, the loan will be restricted to a maximum term of 12 months. The only exception to this is if the loan is to a limited company, some lenders will take a third party charge over your home.

If you are a small business owner, when taking out a second charge bridging loan for business purposes, the 12 month restriction will not apply, even if the loan is against your home.

The interest is typically added to the loan and paid as a lump sum when the loan is repaid. This is known as rolled up interest. If you would rather pay the interest each month you can, however evidence of income will be required to ensure that this is affordable.

How can a bridging loan benefit a small business?

A bridging loan can be a benefit a small business by offering access to fast funds or flexibility, whereas this is often not the case with longer term funding such as mortgages or secured business funding.

The underwriting with bridging finance can be less onerous and much more flexible, with a common sense approach often taken. This can be crucial when needing money quickly.

You can access very competitive interest rates and flexible repayment options provided your exit strategy is fit for purpose. This short-term loan method of borrowing can be a great tool for small business owners looking to expand.

This allows decisions to be made quickly and with less time required to manage your application – especially when guided by a trusted bridging finance broker.

In some cases, proof of income may not be enough to support a business loan or mortgage, whereas a bridging loan lender may look to use projected income, if realistic or verified by an accountant.

Using bridging loans to purchase a property

When a small business owner is looking to purchase a property to trade from, commercial mortgages are usually the go-to option due to the long term nature of the loan. Often, you can repay the loan over 25 years to make the payments affordable. Commercial mortgages aren’t always suitable however, the exceptions to this are:

Firstly, when the property to be purchased is in need of a heavy refurbishment or even change of use. In this instance, a property refurbishment bridging loan would usually be more appropriate.

This is because most commercial mortgage lenders would not allow such heavy works to be undertaken on the property as part of the mortgage. They lend on the basis that the property is fit for purpose day one.

In this scenario, bridging finance would be taken out whilst the works are completed, and then the loan can be refinanced with a commercial mortgage lender.

Where the works are going to result in an increase in the value of the property, you may also be able to borrow the cost of the works.

The second situation is when the loan needs to be completed quickly. Commercial mortgage applications can take 8-12 weeks to complete and as such, they aren’t always appropriate when speed is of the essence.

This is common for auction purchases or where there have been delays with a mortgage application, meaning you must now complete quickly.

In both of these scenarios, it’s realistic to arrange a commercial bridging loan in around 14 days. These loans can also be used to fund bridging finance for land.

Using bridging loans when raising capital to fund a shortfall in cash flow

Small business owners often have a need for a cash injection into their business and, where there is equity available, bridging finance could be an ideal option.

Cash flow can often hold small businesses back when looking to take on a new contract, to expand or take on new staff, this is where bridging finance is a huge benefit.

When a business is looking to fund cash flow, invoice finance is usually the most appropriate form of borrowing, however the criteria doesn’t always work for smaller businesses.

Unsecured business loans can also be a good alternative, however, most lenders require a clear credit history and have strict lending criteria around affordability. Often, the funds are needed to increase your income or cash flow.

As above, a commercial mortgage wouldn’t be appropriate where funds are required urgently or when flexibility is needed.

By taking out a bridging loan and rolling up the interest, you would also benefit by not having monthly repayments to make. This can be particularly useful when cash flow is tight.