With so many finance options to choose from, it can be difficult to know which financial product will offer the best benefits to a business. One commercial product that is growing in popularity among businesses is a bridging loan. So, what is a bridging loan, what are the benefits and why are they witnessing such extensive growth in the finance market?
What is a bridging loan?
A bridging loan is considered a short-term loan for businesses. Typically, businesses can access a bridging loan very quickly. However, its purpose is to bridge a gap in finance, effectively supporting a business during a transition in finance. When a more permanent form of finance is found, the bridging loan should be repaid in full.
The term bridging comes from the fact it can get you from one place to another or bridges a gap in income streams.
In the past, a bridging loan was mainly to fund property purchases, auction buying and property developments. This is because there was a clear commercial purpose at the end to reassure the lender that they will get their money back. However, a bridging loan can be used for a range of different purposes, not necessarily property purchases. All a lender will want to see is a clear exit plan so they can recoup their money.
Typically, businesses exit a bridging loan when to move to another financial product such as a mortgage, or they make a sale or have a guaranteed income in place. Due to the short term nature of a bridging loan, the interest rates can be high, but lenders can be flexible with interest repayments, allowing you to pay a lump sum of interest payment at the end of the loan.
Four benefits of a bridging loan
- Quick access to cash
A bridging loan can be arranged incredibly quickly, often much faster than other forms of finance. Typically, a bridging loan will be available in 24-48 hours. When you consider that a mortgage or business loan will often take a month or two to organise, a bridging loan can help in an emergency or when an opportunity is too good to miss.
- Easier lending
While many business loans require a great deal of information such as the financial position of the business, lending history, credit scores and proof of income, bridging loans are a form of asset-backed lending. This means there are no lengthy checks; the loan is secured against an asset of value.
- No excessive fees
While a bridging loan typically has higher interest rates, the fact that the loan is paid back in a few weeks or months means that the interest is controlled, and the loan is affordable. You do not need to worry about rising interest costs or monthly rates. Instead, your lender will provide a clear interest structure often with flexibility as to how you want to pay your interest.
- Extensive potential
While a bridging loan is typically used for property purchases, a bridging loan can be used for a range of different purposes often with no questions asked. The only thing the lender will want to see if proof that you can pay back the loan and the loan will be asset-backed too.