Bridging loans for small businesses

25 February 2015

Thanks to the evolution of a strong and competitive bridging finance market over the last few years, the range of funding options available to small businesses has grown tremendously. Here we examine two ways in which small businesses might be able to use bridging loans.

Property purchase

Commercial property, particularly when bought at auction or otherwise for less than its market value, often requires work to render it habitable or convert it into the correct usage class. A bridging loan could be used to fund the purchase. These loans differ from more traditional commercial finance in the following ways:

  • The application process is far quicker
  • The loan itself is shorter-term

Otherwise, it functions in much the same way; it is still secured against a property, and your lender can still repossess the property if you fail to keep up repayments or redeem the loan in full when required.

However, the nature of a bridging loan allows you to make a purchase far more quickly, potentially allowing you to get set up whilst a commercial mortgage is still being arranged. It also allows you to secure renovation finance against a property that a lender might be reluctant to grant a commercial mortgage for, or to take advantage of a bargain purchase that will only be on the market for a few days.

Bridging loans are less suitable for situations where you do not need to make a quick purchase and would otherwise be able to secure longer-term finance in the first instance. Because bridging loans tend to come with fees that are comparable to those of a commercial mortgage, as well as typically higher interest rates, the cost of using one transitionally is usually higher than simply opting for a commercial mortgage.

Cash flow injection

Every business needs cash to meet its immediate purchasing needs. To fund vital things like bill payments, materials, transport and wages, a business requires more cash coming in than going out.

High positive cash flow can also help a business to expand, if there is a viable opportunity to do so (for instance, the acquisition of new labour, materials, premises or stock).

Whilst a business that is making a small loss month-on-month can often continue to trade so long as it has plenty of cash coming in, a profit-making business without a strong cash flow will struggle to make ends meet in the short term. Similarly, a business that has a lot of its money tied up in assets – such as commercial property – might experience poor cash flow.

If your business is experiencing a one-off ‘cash flow crisis’, securing a bridging loan against your commercial premises may be a solution to balancing your inflow and outflow. Similarly, if you want to take advantage of a business opportunity but don’t have ready access to cash, you may consider using a bridging loan to raise the needed funds.

A bridging loan might not be so helpful if your cash flow problems are persistent or recurring, perhaps because you have surplus stock or are struggling to recover payments from customers. If this is the case, you might want to consider taking steps to improve your internal operations, or securing finance from another source. Similarly, if the business opportunity you hope to seize involves a particularly ambitious target or may otherwise fall through, using short-term secured finance to fund it may not be the most appropriate route.

Bridging finance works best when you have a solid exit strategy in place. If you have a sure means of repaying it, however, then a bridging loan can be an invaluable tool to quickly buy premises or goods or provide a short-term boost to your operating capital.

Written by Ben Gosling for commercialtrust.co.uk.

Your property may be repossessed if you do not keep up repayments on a bridging or commercial loan secured against it.

Some bridging and commercial loans are not regulated by the Financial Conduct Authority (FCA).