As more bridge loan lenders enter the market the cost of borrowing short term capital has fallen dramatically. This has allowed firms to lend for expenditures such as purchasing inventory, expansion and boosting cash flow.
Many businesses have taken advantage of this so far; therefore it is an interesting topic to follow on from the original article by David surrounding bridge finance and why the industry is booming.
So…what is a bridge loan?
Put simply, a bridge loan is a way to allow firms access to credit easily and quickly. By using assets such as personal or commercial property, you can release equity in order to fund business-related expenditure.
Bridge loans have been around for a long time, primarily used in the property market to prevent buyer chains collapsing when other financial arrangements were in place. In the literal sense, it allows you to bridge the gap between shortages in capital.
Some large banking institutions do have a bridge capital service, but they are in the minority. This led to the gap in the market being filled by many small bridge lenders who have taken advantage of individuals looking for a healthy return on their unused capital. The majority of bridging financiers function solely online, allowing clients based anywhere to find them easily, making the market open and competitive.
So why would I be interested in this?
There is no getting around the fact that capital is still difficult to source, even for the safest lender. This may lead to missed opportunities and possibly damage your company’s reputation, for example running out of stock during a surge in demand.
If you have recently secured finance, Great! But it may be up to 6 months before you see any of this money. Also if you are experiencing temporary cash flow problems, you may benefit from bridge loans especially in seasonal industries, needing to cover costs in periods of low activity.
The speed of the cash put into your account is the greatest advantage of bridge loans, often being a very personal service that takes a matter of days. They will also be sure that bridge finance is the best option for you (as the lenders want to be sure they will get their money back!)
Ok, how much?
You can expect to pay an arranging fee which covers all of the checks the financer will have to make, such as application, legal and valuation costs. Usually this will be directly invoiced to you. Lenders will offer varying rates of interest dependant on your circumstances (usually between 1 and 2% per month). However, if you have a lot of value in your assets and are not classed “high risk”, you could see interest rates as low as 0.5% a month.
What assets can I use?
Dependant on the lender, you could borrow against every asset with resale value that you own. However, with more mainstream creditors, assets that are high value and can be quickly resold are more likely to see your request accepted. This includes residential and commercial property, mixed use property, offices, retail shops and land. In many cases, you can pool your assets to borrow a higher amount.
What is the process of obtaining a bridge loan?
A good quality bridge lender will find out exactly what you are spending the capital on. They will then assess the resource that you are borrowing against and send an independent surveyor to value the asset. This will make up the loan to value (LTV) ratio that you receive, which can be anywhere between 40 and 80%.
Finally, the lender will ask for an exit strategy. Bridge loans are for short periods of time and can become an expensive option if you do not replace the bridge with a more long term financial option. This could be selling other assets, streamlining your business or refinancing with another loan.
Bridge loans are often more straightforward than standard bank loans as they are based on the value of the asset you are using as liquidity. With bank loans, there will be paperwork, bank manager meetings as well as the period it takes for the loan to arrive (a lot longer than a bridge lender).
What do you mean ‘exit strategy’?
As bridge finance is a short term solution, some situations may not be appropriate. If you think the loan may last for longer than a year, it may be best to consider other methods to raise capital.
If your business needs to raise money quickly to buy stock to meet a surge in demand, a bridge loan may be a perfect way to quickly get the funds in your business and this would be a big benefit. However, if you are experiencing cash flow problems due to a high wage bill, unless you put a restructure in place, allowing funds to be available within months, a bank overdraft or other financing means may be more beneficial for you.
So can I use a bridge for my business?
Overall bridge loans may not be for every business need, especially if you do not know how you can pay the loan back. Troubles with cash flow are a risky issue to address with a loan like this unless you can prove you will be able to address the problem and the bridge will be beneficial.
However, meeting exceptionally high demand when your competitors cannot is an extremely attractive proposition, and something a bridging lender can help you with. This makes the expansion in the industry not look like it is slowing down anytime soon and could very well change the way commerce borrows forever.
Written by Jonathan on behalf of Balmoral Bridging, a bridge loan lender who offer bridging finance usually within 5 days.