Bridging finance can be a valuable tool for accessing funds to grow your business, but like any financial decision, it comes with both benefits and risks.
With around £7 billion worth of bridging finance processed each year in the UK, whilst it is mostly used for property development and purchasing property under short deadlines, this type of fast, short term finance can also be used to leverage your assets for growth purposes.
For marketing agencies, aviation companies, food producers, startups, investments and more, the opportunity to use stock, inventory or any assets can be used as security to access bridging finance up to several million pounds.
Before opting for bridging finance, it’s essential to carefully assess your business’s specific needs, financial health, and the potential impact on your overall strategy. In this piece, we will explore the advantages and disadvantages of bridging finance to help you make an informed decision.
The Advantages of Bridging Finance
Quick Access to Funds
One of the primary advantages of bridging finance is its speed with firms able to access funds within 2 to 4 weeks – and this can be several million pounds (Source: Octagon) . Traditional business loans often involve a lengthy approval process, while bridging finance can provide quick access to funds. This can be crucial when your business needs immediate capital for expansion, seizing opportunities, or addressing unexpected challenges.
Flexibility
Bridging finance is known for its flexibility in terms of usage. Unlike some traditional loans that may have restrictions on how the funds can be used, bridging finance can be employed for various purposes, such as purchasing inventory, acquiring new equipment, or funding a marketing campaign. The flexibility allows you to pay in monthly instalments and repay early if you need to. Should you find yourself unable to repay at the end of the loan term (maximum 24 months), you can typically refinance under different terms too.
Temporary Solution
Bridging finance is designed as a short-term solution. This can be beneficial when you have a clear plan for repaying the loan in a relatively short period. It allows you to address immediate financial needs without committing to long-term debt, providing more agility in managing your business finances.
Leverage Money Tied Up In Your Property
If your business involves property , bridging finance can be particularly useful. It allows you to leverage existing property assets to secure funds quickly such as offices, commercial units, garages, warehouses or more which can be advantageous when timing is critical in a competitive market.
Bridging lenders such as MT Finance and Precise will not allow you to borrow against your primary residence, the property used must be a commercial asset, in line with regulation.
Drawbacks of Bridging Finance
High Costs of Interest
The main drawback of bridging finance is its relatively high cost compared to traditional loans. Interest rates on bridging loans are often higher at around 1% per month, and additional fees may apply such as initial valuation, survey, broker and legal fees. At 12% per year minimum, this is higher than a secured mortgage at around 6% and personal loans from 4%.
It is crucial to carefully evaluate the total cost of the finance and ensure that the potential benefits outweigh the expenses.
Short-Term Nature
While the short-term nature of bridging finance can be an advantage, it can also pose a challenge. If your business faces unexpected delays or struggles to generate the expected revenue within the specified timeframe, repaying the loan can become stressful. It’s essential to have a realistic and well-thought-out exit strategy.
Risk of Dependency
Relying too heavily on bridging finance can lead to a dependency that may not be sustainable in the long run. Businesses should be cautious not to make bridging finance a recurring solution for ongoing operational needs, as this could result in a cycle of debt.
Risk of Repossession
If you’re using assets, particularly property, as collateral for the bridging finance, there is a risk of losing those assets if you fail to repay the loan. It’s crucial to carefully consider the potential consequences and have a solid repayment plan in place.
In deciding whether to use bridging finance to access funds for your business growth, it’s crucial to weigh the advantages against the disadvantages. Consider the urgency of your financial needs, the potential return on investment, and your ability to repay the loan within the stipulated time frame.
While bridging finance can be a valuable tool for seizing immediate opportunities and fueling growth, it requires a strategic approach to mitigate risks and ensure the long-term financial health of your business. Consulting with financial experts and thoroughly understanding the terms and conditions of the bridging finance arrangement is vital in making an informed decision tailored to your business’s unique circumstances.
