There may be a time when your business needs temporary funding until it can get sufficient cashflow or permanent funding. A bridging loan you can repay within a few months could help.
Key points about bridging finance for business
- The median amount requested for a bridging loan is $112,500, according to Lend proprietary data
- A bridging loan can help you bridge the gap between financial transactions or funding periods
- Interest rates are typically higher compared to traditional business loans
- You may be asked to provide collateral to secure the loan
What's a bridge loan?
A bridging loan, or bridging finance, is a short-term business loan that provides quick access to cash until a more permanent source of finance or better cashlow is available. It 'bridges the gap' between financial transactions like a debt or large purchases, or between periods of funding uncertainty. Lenders often require collateral to secure the loan, usually in the form of property or business assets.
Loan terms on bridging finance are shorter, ranging from 3-12 months. Bridging loans typically have higher interest rates than traditional small business loans because repayment periods are shorter.
When to use a bridging loan?
According to proprietary Lend data, the most common reasons businesses take out a bridge loan in 2023 include:
- Other (e.g. inventory, paying staff): 27%
- Start a business: 20%
- Buy a business: 15%
- Day-to-day capital: 15%
- Buy or develop property: 11%
- Expansion: 11%
How does a bridging loan work for businesses?
A bridging loan provides short-term financing to businesses until they can obtain more stable cashflow or financing. Once stable cashflow or funding is secured, the loan is repaid, often through a lump sum payment or refinanced with a longer-term loan.
Pro tip: In many cases, the interest on a bridging loan compounds each month until you repay it. This can get expensive if you opt to pay all your interest at the end of the loan term. It also means that the longer you borrow for, the more costly your loan will get. This can be a major pitfall if you need your facility for longer than you expected (e.g. for a property transaction).
Closed bridging loan vs open bridging loan
There are two main types of bridging loans — closed bridging loans and open bridging loans.
Closed bridging loan: Has a specific end date agreed from the outset.
Open bridging loan: Doesn’t have a predetermined end date. Instead, you’ll have a certain period to repay the full amount (e.g. six months).
Who’s eligible for a bridging loan?
Most Australian businesses and sole traders are eligible for a bridging loan if they meet the lender’s minimum criteria, including:
- An active ABN or ACN (proof you’re operating a business registered in Australia)
- Trading history of six to 12 months
- A steady turnover to repay the loan or collateral
- A good credit score — the minimum credit score for business lending is around 400.
How much can you borrow with a bridging loan?
According to Lend proprietary data, the median amount requested for a bridging loan is $112,500. However, you can borrow anywhere from $5,000 up to $5million on a bridging loan, depending on the lender, your business creditworthiness and revenue, what you need the money for, etc.
5 ways to use a bridge loan for your business
1. Buy property
One of the most common uses for a business bridge loan is to buy, develop, or renovate property. For example, you could be a developer wanting 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 the apartments. Or, at that point, you could replace the bridging loan with a commercial mortgage and rent out the apartments.
2. Buying at an auction
You may need a bridging loan to snap up a one-of-a-kind opportunity at an auction. If you’re
the successful bidder at the auction, you’re typically required to execute the Contract of Sale on the day or at least need finance approved and ready.
A business bridge loan could give you the funds you need to secure an important asset like machinery or specialised equipment while you organise long-term finance.
3. Pay vendors or suppliers
If you need to pay vendors or suppliers while waiting on getting payment from your customers (especially if you offer credit terms), you could use a bridging loan to cover your cost of sales, then use the sale proceeds to pay it off. You could alternatively try invoice finance.
4. Cashflow management
You can use bridging finance to cover seasonal cashflow gaps and everyday expenses. For example, you could be experiencing a slow period or fulfilling large orders. You could need a bridge loan in the meantime to cover operational expenses like payroll, super contributions, insurance premiums or tax bills.
It’s worth noting that bridging finance is an expensive way to cover cashflow shortages. It may be best to look for a flexible financing solution like a business credit card or line of credit.
5. Business expansion
Some businesses may need a bridging loan during their critical expansion phase, until they can increase revenue or obtain longer-term finance. It can also be used to fund growth initiatives like opening new locations or launching new products.
Pro tip: You can use bridging finance for all sorts of commercial purposes, as long as you know when you will exit. That's the point at which your loan term ends and 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.
Bridging finance pros & cons
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How to apply for a bridging loan
If you’re shopping for a bridge loan, the process is similar to applying for a standard business loan. Lenders will assess your business’ credit profile and the purpose of the loan.
1. Find the right lender
You’ll essentially have the choice between going with a traditional bank or non-bank lender. Compare each lender’s requirements and their fees, terms and conditions. But, don’t submit loan applications with multiple lenders as this could hurt your credit score.
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.
2. Submit supporting documents
Just as for any other type of business loan, you’ll need to provide financial documents to show you can service the loan. You’ll be asked for:
- Bank statements from the last six to 12 months
- Business registration and tax information (e.g. BAS statements, tax returns)
- Identification documents (e.g. driver’s licence, passport)
If you’re buying property, you may also need to provide:
- A statement of all expenses from the previous owner
- Renovation/development costs & schedule
- A business plan
- An exit strategy in case your project doesn’t go according to plan
3. Provide your business information
Lenders will examine your business model and how long you've been operating. For a bridge loan, they will want a clear repayment plan or to assess the project you wish to finance. They'll want to make their own valuation if you're buying property. They need to know you can realistically repay the loan within the term.
FAQs about bridging finance
How is interest calculated on a bridge loan?
Interest on a bridging loan can be fixed or variable, and accumulates over the loan period. It typically compounds month to month. This means that each month, the interest is added to the amount you owe, and the interest for the next month is calculated based on this new total. This can cause the overall interest cost to go up over time, especially if you don't repay the loan quickly.
What are the fees associated with a bridge loan?
A bridging loan usually incurs an establishment fee (usually calculated as a percentage of the total loan amount), plus monthly fees. Most bridging finance options also charge termination or closing fees if you repay the loan too early.
Do I need to provide collateral for a bridge loan?
Yes, you typically need to provide collateral to obtain a bridging loan — usually property (equity). Some bridge loans allow you to collateralise business assets like equipment, stock or accounts receivables.
How long does it take to get approved for a bridging loan?
Bridging loans are designed to provide immediate funding, so the whole process usually only takes a few days. To expedite the approval process, ensure you provide all the required documentation from the get-go.
Can I get a bridge loan if I have bad credit?
Yes, you can still get a bridge loan if you have bad credit as long as you can offer suitable collateral and can show you have the minimum required revenue to service the loan. You’ll likely pay a higher interest rate to compensate the lender for the added risk. You could alternatively apply for a bad credit business loan.
1. Proprietary data of small businesses who applied for bridging finance through Lend.com.au and have been operating for at least five years (2023).
