Bridging loans have seen a dramatic increase in borrowing over the last year as the market continues to mature. At one time, bridging loans were usually only used for the property market. As the market develops and matures, more businesses are taking advantage of this option to free up capital at times when it is needed.
What is a bridging loan?
Put simply, bridging loans can bridge a gap in cash flow. If your business is making a small loss month on month, but has relatively strong cash flow, your business will survive over the medium term, as long as you have available credit streams. On the other hand, a poor cash flow will kill your business instantly.
Bridging finance can be borrowed against property including buy-to-let, residential and commercial. Because of the nature of the lenders, it is a personalised service and a final decision will often be based on more than simply how much the asset is worth.
It is a short term option, therefore it is important to have an exit strategy in place. This is not a route to go down if you have constant cash flow issues, or are borrowing on an ambitious sales target. In these situations, a more traditional loan is likely to be more beneficial for your business.
So what can it help me with?
A lot of lenders are now coming from more diverse industries. For example, the property developer Citu spotted an opportunity to buy an old warehouse and turn it into residential flats. Due to the state of the building, they found it difficult to get funding from a bank to buy the property and redevelop it. Therefore they acquired a bridging loan to cover the cost of buying and renovating it. Taking just over two years, the building is now a fully functioning block with flats to rent and buy.
Therefore when the circumstance is correct, bridging finance can be used as an alternative to construction finance. This is particularly relevant for large property developers who have a lot of capital locked in their newly built properties and are suffering from cash flow problems, and are considering developing further.
Should I use it for cash flow?
Moving away from construction, businesses of any sector can benefit from bridging loans by simply using their assets. For example, if a company director finds that they have a lot of liquidity trapped in invoices or stock that isn’t coming to fruition for several months; they can borrow money against another asset they own. In a lot of cases this is residential property, such as buy-to-let. By freeing up equity in this way, the director can increase cash flow, pay back the bridging loan after a few months and avoid having to factor their invoices or release equity from elsewhere.
Due to the bespoke approach from lenders, this often works as a partnership. With the financiers looking to ensure their loans are safe and the borrowing business is looking to ensure they pay back the loan on time. By working together, this often leads to businesses using the service again, building up long term relationships. The bridging lender will often look past bad credit history; ensuring clients are confident of their position and has the ability to repay in the allocated time frame.
Overall, bridging loans are a very useful way in which to free up equity to boost the cash flow in your business. By loaning against assets outside of the business (such as a property from your portfolio), you can avoid having to factor your invoices or sell your stock at a lower cost to what you would usually. Although not ideal for every circumstance, there are now a lot more lenders in the bridging market, making the industry more competitive and allowing better terms.