What is bridge financing?

Whatever kind of business you are running, there are times when you may need immediate access to a significant capital sum – for the purchase of a major asset, such as new company headquarters or the re-equipping of your production lines, for example.

Bridging finance

Those are circumstances in which you might want to consider bridging finance – so-called because it typically bridges the gap between your immediate need for the capital advance and a longer-term solution to repaying that debt.

The short-term nature of bridging finance is highlighted by accountants Ernst and Young (EY). They reveal that the average term of such borrowing is 11 months – within a range of between two weeks and three years.

How bridging finance may help your immediate needs

When you have decided on a major capital investment, a significant sum is likely to be involved – and, often, it may be needed quickly. You might have found the ideal premises in which to establish new company headquarters, for example, and the market is highly competitive with many rival bids for the same property. You may be hamstrung by the fact that sizeable, long-term finance – such as a mortgage – may take a long time to arrange. So long, that you have missed the chance to buy those ideal premises.

Bridging finance has the considerable advantage in those circumstances of being arranged as quickly as around 14 days – or even less.

Typically, you may not need to make monthly repayments on your bridging loan – although repayment of both the capital and interest is covered by other assets pledged as security – and this may help in circumstances where your cash flow is already under financial pressure.

Thanks to competition in the marketplace for bridging finance, interest rates are competitively priced – although you must expect to pay a higher rate of interest than on a long-term mortgage, for example.

If property or other major assets you intend to acquire are being sold for somewhat less than their full market value, you may nevertheless be able to arrange bridging finance for the full value – effectively covering any deposit that may be involved in the purchase.

As far as property is concerned, bridging finance may be available even where a conventional mortgage might not – if you are buying derelict or semi-derelict property, for instance, that you want to refurbish, modernise and subsequently put to business use.

The need to be careful

Bridging finance is almost certain to be a more expensive method of borrowing than long-term finance, such as a regular commercial property mortgage. So, it is important that you take into account the full cost of borrowing before taking on the commitment of short-term bridging finance.

Some bridging loans may be very short-term. The short-term nature of the borrowing and the need to make full and final repayment of the advance at the end of that term needs to be closely monitored and managed so that you are certain of meeting the deadline. If you fail to make that repayment, the asset or assets which you pledged as security – your current company headquarters, or the premises you are buying with bridging finance, for example – may be repossessed by the lender and cause you still further problems.