Everything you need to know about business bridging finance


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Wondering what bridging finance is and how to get it?

If so, this article is for you!

I’ve put this guide together to help you understand:

  • What bridge loans are and how they work
  • When you might need to use one
  • Where to look for bridging finance
  • The main costs and risks

First things first…

What is a bridge loan?

A bridge loan is a short-term loan you can use as funding for your business until you have a more permanent source of finance in place. Its purpose is to hold you over during a defined period – it’s a ‘bridge’ because it gets you from one specific point to another.

Bridging Finance

There are two types of bridging loans you should know about: closed bridge loans and open bridge loans.

  • Closed bridge loans have a specific exit date agreed from the outset
  • Open bridge loans don’t have a pre-determined end date. Instead, you’ll have a certain period in which to repay the full amount (e.g. 6 months)

You may want a bridge loan if you have a strict deadline to meet – and missing that deadline could cost you a major business opportunity.

A bridge fund could let you access the funds you need quickly, so you can complete the deal while you work on setting up a more stable, long-term source of funding.

So you might be wondering: ‘What can I use a bridge loan for?’

I’ll give you some examples.

The four main sources of funding for your business purchase

1. To buy property

The most common use for a bridge loan is to develop, renovate, or buy property.

It doesn’t matter how big or small the project is – you can use bridging finance to add to your space, to completely redesign your premises or to buy or even build in an entirely new location.

Here’s how it works. Say you’re a property developer and you want to build a block of apartments. You could take out a bridge loan for the time it takes to build the property, then pay it off once you complete the project and sell off the apartments. Or, at that point, you could replace the bridging loan with a commercial mortgage and rent out the apartments.

Bridge Loan for a Property

As a small business owner, imagine you need to move to a new location, but you can’t afford any major disruption to your operations. You could use bridging finance to buy a new warehouse or office space and relocate in a controlled fashion, before selling off the old property once you no longer need it.

2. Buying at an auction

Bridge Loan for an Auction

Sometimes, one-of-a-kind opportunities come up at auction. You might need to move fast to snap up a great deal – but you don’t have long to pay once you’ve won an auction.

A bridge loan could give you the funds you need to secure an important asset while you organise long-term finance.

3. Paying a vendor

Bridge Loan for a Vendor

All too often you might face a long gap between paying your suppliers and getting payment from your customers, especially if you offer credit terms. If you need to pay a vendor right away you could use a bridge loan to cover your cost of sales, then use the sale proceeds to pay off the bridge loan.

4. Covering vital expenses

Bridge Loan for a Business

There’s nothing more important than paying your bills, but cash flow problems can bring a business of any size to its knees! If you’re waiting for funds to come in (those credit terms are great for attracting customers, but they really can make cash flow tricky!) you could use a bridge loan to cover crucial expenses like your payroll, super fund contributions, insurance premiums or tax bills.

LEND TIP

Be wary though – bridging finance is an expensive way to cover cash flow shortages. You might want to look for a flexible financing solution (such as a business credit card or line of credit) to help you boost your working capital and keep your business running smoothly.

Actually, you can use bridging finance for all sorts of commercial purposes, as long as you know when you’re going to exit.

What do I mean by ‘exit?’

Bridge Loan Start - Exit

That’s the point at which your loan term ends you pay off the entire balance in full, including interest – either because you no longer need funding, or because you’ve secured an alternative, long-term financing arrangement.

If you need fast funding, you might be thinking that a bridge loan sounds pretty appealing right now.

But before you make any decisions, you need to know the good and the bad.

Pros of bridging finance: Cons of bridge loans:
  • If you have decent collateral to offer you may be able to get a bridge loan even if your credit rating isn’t great.
  • It’s quick and easy to apply, so you could receive approval and funding within days.
  • It can allow you to act fast, so you don’t miss out on a deal while you put more permanent funding in place.
  • You may only have to make interest payments during the term of the loan. You may even be able to defer payment altogether until you repay the full loan.
  • They often carry higher interest rates and fees than other types of business funding.
  • A bridge loan is only a short-term option. You’ll need to secure more permanent funding before the loan period expires.
  • You’ll usually need some form of collateral.
  • Often the interest on a bridge loan compounds from month to month – so if your project overruns you could end up paying a lot more than you expected.

Still got questions?

Keep reading!

Bridging loan FAQs

How will I repay my loan?

Commonly, you’ll make a single, lump sum repayment at the end of your loan term (covering the amount you borrow, plus interest).

Alternatively, your lender may want you to make regular payments (these could be daily, weekly or monthly). Often these incremental payments only cover interest – you’ll then repay just the principal at the end of the term.

You may be able to negotiate repayment terms with the lender to suit your cash flow.

How long is the term of a bridge loan?

Typically, anywhere from 1 to 12 months.

What is the interest rate on a bridging loan?

The interest rates on bridging loans can to be pretty high compared to other business finance rates.

Bridging finance can be especially expensive if you opt to pay all your interest at the end, because that interest will compound each month until you repay the loan. That means that the longer you borrow for, the more costly your loan will get.

This can be a major pitfall if you end up needing your facility for longer than you expected (and let’s face it, if you’re using it for a property transaction, delays are all too likely).

What other costs and charges can I expect?

On top of your interest you’ll usually have to pay an arrangement or set-up fee for your facility, plus ongoing administration fees. There’s a good chance you’ll be charged a termination or closing fee, too – and there may be hefty break fees if you want to get out early.

These fees and charges vary widely from lender to lender, so be sure to find out exactly what you’re going to end up paying (along with any other terms and conditions) before you lock yourself into a loan.

By now I know you might be thinking: ‘Those payments sound excessive. A bridge loan just might not be worth it.’

But hold on.

The fact is, it really depends on what’s right for your business. A bridging loan could open the door to incredible business opportunities.

What you need to decide is:

Do the costs outweigh the benefits you could gain from the opportunity you want to pursue?

If closing that amazing deal…

…or buying that prime location property…

…or making that once-in-a-lifetime business acquisition…

…is going to help you grow and boost your profits, the short-term cost of the loan might well be an investment worth making.

How much funding can I get?

You can apply for bridging loans of anywhere from $5k to $10m. But how much a lender will actually be willing to offer you will depend on many factors, including:

  • What you need to borrow the money for
  • What security you’re offering
  • How creditworthy your business is
  • Your capacity to service the loan

How long will it take to get my funds?

Bridging loans are designed to let you act fast, so you can expect a speedy application process and fast funding if you’re approved. The whole process usually only takes a few days.

Will I need collateral?

Usually, yes. You may be able to offer property, equipment, stock or even cash flows from unpaid invoices as security for your loan.

Is my credit rating important when it comes to getting a bridge loan?

The short answer is...yes. Lenders will usually look at your credit.

But…

…if your credit score isn’t as good as you’d like it to be, there may still be some lenders who are willing to lend to you. That’s assuming that the security you’re offering is good enough, and you can show you have the funds to service the loan.

Of course, you can expect to pay even higher interest on a ‘bad credit’ bridging loan, to compensate the lender for the risk they’re taking on you.

Where can I go for bridging finance?

If you’ve decided bridging finance is the right way to go, you have two main options.

Let me tell you a little about them:

1. Traditional lenders (high street banks)

Turning to a high street bank can be a good option if you’re looking for business bridging finance, because:

  • They often offer relatively low interest rates.
  • You may be able to get more time to repay your loan than other lenders will offer you.

But…

  • You will need to have a good credit rating and a solid trading history to qualify for any sort of finance from a traditional bank.
  • It will take longer to apply, get approval and receive your funds than if you opt for a bridge loan from an alternative provider. You may have to provide a lot more documentation, too, which can slow things up just when you really need to move fast.
Bridging Finance Traditional Lender

2. Alternative lenders

There’s a thriving alternative finance market in Australia. More and more business owners are turning to alternative lenders for all types of business finance, because:

  • They are usually easier to get than traditional bank loans. Many lenders have higher risk appetites and approval rates, so your credit history doesn’t need to be perfect and you don’t need to have several years’ successful trading behind you.
  • They tend to have fast, simple online application processes and you can expect to have funds in your account within days if your bridge loan application is approved.

Unfortunately…

  • They have higher interest rates than bridging loans from traditional banks.
  • Alternative lenders are not regulated in the same way as the high-street banks, so you need to be careful about who you’re dealing with and exactly what terms you agree to.
Bridging Finance Alternative Lender

Difference between traditional and alternative lenders

Traditional Lender Alternative Lender
Interest Relatively low Higher
Credit rating requirement Good Flexible
Trading history requirement Solid & long Flexible
Application process Long Quick

How do I get a bridge loan?

If you’re shopping for a bridge loan, the process is similar to applying for a longer-term loan.

Here are the steps you can take to find the right bridge loan:

1. Contact several lenders

There’s a lot of competition in the alternative finance market, and shopping around is most definitely in your interest.

Bridge Loan Contact Lenders

You should check out several lenders before you pick one. Find out each lender’s requirements and their fees, terms and conditions. If you don’t have the time for in-depth research, you could contact a business loan broker for help.

2. Find out if you qualify

Each lender will have a different appetite for risk, and some have strong preferences about the kind of business they like to work with, or what kind of deals or projects they’ll fund.

A declined application will leave a black mark on your credit record – not to mention the inconvenience of missing out on the funding you need. So it’s important that you check out what their lending criteria are and find out if you qualify before you apply.

5C Principal

Lenders will use a formula to assess your application based on the ‘five c’s’ principles. Character and capital probably won’t be as important for a short-term bridging loan as for other types of business finance, but they’ll definitely consider:

  • Collateralare you offering valuable enough assets as security for your bridge loan?
  • Capacityare you generating enough profits (or will the deal you want to fund make enough profits) to repay the loan plus interest?
  • Conditionswill the lender earn enough interest to compensate them for the risk of lending to you?

3. Contact several lenders

It’s a good idea to sit down and compare the cost of each lender, as well as any pros and cons.

Bridge Loan Compare Lenders

The cheapest loan isn’t always the best – for example, a closed bridge loan with a pre-determined end date may cost less than an open loan, but what happens if you’re not ready to settle when the time comes? Some lenders might impose heavy penalties if you want to exit the arrangement early – but what if the deal falls through and you no longer need the finance?

4. Provide documents to support your application

Just as for any other type of business loan, you’ll need to provide supporting documents with your application. These can be pretty comprehensive for a traditional bank loan, but less of a burden if you’re applying for bridge finance from an alternative lender. You may be asked for:

The lender will also check your credit report.

  • Your business information – ABN / ACN, address, director/s / owner’s details etc.
  • Your tax returns or financial statements
  • Bank statements, transaction records or sales contracts
  • Evidence that you own any property you’re offering as collateral

If you’re buying property, you may also need to provide:

  • A statement of all expenses from the previous owner
  • Projected renovation costs
  • Projected project schedule
  • Your plan of action
  • An exit strategy in case your project does not go according to plan

5. The lender will assess your application

They’ll start by checking out your business to see how creditworthy you are and how much you can afford to borrow, using the five c’s criteria I told you about above.

Bridging Purpose

But for a bridge loan they’ll also assess the project you want to finance – so if you’re buying property, for example, they’ll want to make their own valuation. Basically, they need to know that the deal you’re making is sound, so you’ll realistically be able to repay them within the term of the loan.

6. Your lender will approve your bridge loan! (Well, hopefully!)

Ideally, you’ll get the big fat YES you’re hoping for, and you’ll soon have the financing you need to kick off your project, make your exciting acquisition or develop your property.

If you don’t get approved, don’t despair. There may be other qualified lenders who will be willing to offer you a bridge loan – at the right price. A business loan broker will be able to help you explore your options, but it’s a very good idea to get financial advice at this point too, to make sure that bridge finance really is the right choice for your business at this time.

Conclusion

Bridge financing could be just what you’re looking for – in the right circumstances.

By ‘the right circumstances’, I mean you need funds fast, so you don’t miss out on a killer business opportunity. Or you need short-term finance to tide you over while you do something important, like buy and move into a prominent new store, or transfer all your stock to a new state-of-the-art logistics hub.

In a nutshell, bridging finance is stop-gap funding, and it’s generally pretty expensive. Before you apply you need to be sure that the benefits of whatever project you want to fund will outweigh the high costs of a bridge loan.

But if you need funding right now, so you can act fast while you secure more permanent and stable finance, then a bridge loan just might be the difference between closing that deal and watching fortune pass you by.

There are many different ways to raise funds to buy your business and you may have to explore a few of them before you raise the funds you need. But don’t give up! With time and effort, you could soon be the proud owner of your exciting new business.

Have you ever relied on a bridge loan for your business? Would you recommend it to others? Tell us in the comments below.

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