Bridging finance, by definition, is used to help bridge a financial gap between two points. It’s a short-term loan acquired mainly by small businesses and individuals facing financial constraints. For most loaners, the amount is used to make necessary purchases and then repaid later once they acquire additional funds.
This is usually an excellent way for an individual to get support in their business. This form of financing is usually suitable for a wide range of businesses such as retail shops and property-related finance. The function of bridging loan finance is simple, as explained below.
Using Bridging Finance
As discussed, bridging finance is a type of loan. Businesses and individuals acquire these loans to get them from point A to point B. The loan can be used in the following ways:
Purchase Of New Property
Property acquisition and renovation are common uses for bridging loans. If you want to relocate your business or even move houses, you can acquire a loan, secure the property or build the house, then pay off the loan once you sell off the previous property.
You may also acquire the loan, build your new property, and then sell it to pay off the loan. For commercial units, you can exchange the loan for mortgages once you rent off the property.
Buying At Auctions
In auctions, people are usually given less than a month to pay for the property they’ve won. You may win some items or properties, but you’re low on finances, and you need to move fast to acquire what you won in the auction. Bridging loans will help you get the necessary finances to pay for the items.
Paying A Vendor
There are cases where a retailer sells on credits but needs finances to make new purchases. The retailer can make a deal with a lender to get a loan and pay for the purchased goods. The loan can then be repaid after selling or once those purchased on credit are paid.
Start A New Business
In case an investor wants to start a new business, there are several ways to acquire funds to kickstart their new venture and cover its associated costs. They may opt for crowdfunding or loans. Other loans will depend on the assets as security. However, because assets may be lacking at the beginning, funds acquisition will be limited.
It’s normal for businesses to be short on finances needed to cover bills such as electricity, payrolls, fund contributions, tax bills, and insurance premiums. This could be caused by unforeseen circumstances that used up the company’s finances. Bridging loans could help cover such expenses and help the business get on its feet until it’s stable enough to cover the bills and pay off the loan.
Prevention Of Repossession
Some businesses are set on loans and debts. There’s usually a risk of the business and properties being repossessed by the lenders. This could be an extensive setback for an investor. However, bridging finances could help pay off the loans and debts. This will help prevent the repossession of properties by transferring the loan to a different lender and deadline.
Exiting A Bridging Loan
Exiting from a loan plan is a crucial procedure for any company. There are two ways a business can pay off the bridging loans:
- Closed Bridging: In this form, the exit strategy is well known to the lender. The repayment method and the date of repayment are predetermined and well set. The interest rates are usually low because of a clear repayment structure. To get a closed bridging loan, you have to prove your ability to pay back on the specified date.
- Open Bridging: There’s no clear strategy or date on when the loan can be repaid in an open bridging arrangement. This uncertainty causes the interest to be higher than in closed bridging. Usually, lenders give up to 12 months for the loan to be repaid.
Several costs can be incurred when using this type of loan. This largely depends on the lender. Some will charge hefty penalties when the loans aren’t repaid on time. There could also be break-up fees once you exit earlier than the stated date. Some lenders could also charge administration fees which will increase the total cost of money repaid.
While bridging loans are essential as they can open up opportunities for potentially better businesses., they can also be costly compared to other loans because they are short-term loans. You shouldn’t consider them for the long term due to the high interest rates. It’s always advisable to research or consult professionals on the pros and cons of loans before applying for one.