Bridging Finance in business – what is it? is it worth it?

—TechRound does not recommend or endorse any financial or investment advice or practices. All articles are purely informational—

Bridging finance is typically used in property-related developments to help developers purchase or renovate residential or commercial properties. These kinds of investments usually require a large lump-sum payment up front. Developments akin to this have historically asked for large up-front payments, and so if you find a company that can offer a Bridging loan, this can jump start a project by weeks or even months by accessing funds significantly quicker than an industry standard lender.

One would be more likely to access a bridging loan through a specialist finance company, challenger bank or perhaps a private lender. This means more flexibility when it comes to terms of the loan. Some of the more well-known lenders are Octagon Capital, UTB Bank, Masthaven, MT Finance and Shawbrook Bank. Bridging finance always requires a clear exit strategy when agreeing to terms of the bridging loan, due to the responsibility by the owner of the business to show a comprehensive repayment plan to the lender.

Would bridging finance be the right decision for me?

There are a number of key ways that a bridging loan can be differentiated from a traditional loan. These include:

• Bridging loans are heavily favoured for short-term endeavours and work very well for specific products.
• Bridging loans can be set apart from other methods due to the speed that one has access to their funds. This can usually take a mere number of weeks, and mostly always under a month.

If you have a specific business project in mind, with a clear repayment strategy and exit plan, bridging loans can be a great option. Regular term loans may be a better option for more general commercial projects where time-frame is not such a factor.

During the ‘exit strategy phase’, if the project is not meeting its milestones, there is the possibility of complications arising, however, with the lender having the ability to repossess the property if losses are sustained. If this occurs, refinancing loans could be provided but under far less favourable terms. This is where bridging could become costly for a business.

What are the other costs involved in Bridging finance?

Starting a project involving bridging finance will most likely incur other costs, such as Valuation fees for the property (in the UK up to £1,000 for a basic 4 bed property), fees from brokers (around 1-2% of loan value), solicitors and general admin.

If the loan repayments are not kept up with, late payment fees are a commonality, or if the loan repayments are made too early, there is the possibility of an early repayment fee. Levels of costs certainly will differentiate between lenders, and checking the terms and conditions of the loan is of paramount importance before proceeding with bridging finance.

—TechRound does not recommend or endorse any financial or investment advice or practices. All articles are purely informational—