Guide To Business Bridging Loans – Pros and Cons | Shortterm

Business Bridging Loan Overview

A business bridging loan is a commercial loan that helps you to lend money for a shorter period. Many small businesses need short term finance to fulfil their current financial needs. A short term bridging loan can help you in solving the current financial needs of your business.

There are a number of options available for businesses to get funding, but the suitability depends on current circumstances and your business requirements.

There are many lenders in the UK offering business bridging loans. If you are considering this type of loan for the first time, you may have any questions about it in your mind. Here we are describing everything that you need to know about commercial bridging loans in the UK.

Business Bridging Loan Overview

A business bridging loan is also known as a commercial bridging loan. As the name suggests, it is a type of funding for borrowers who need money to use for a commercial purpose. Such loans are taken out by businesses that need funds for a short time, such as when you are waiting for your client for payment, but you need to purchase new stock.

It means it is used to bridge the gap when you are looking for a permanent or long term funding source. Typically it is relatively simple, quick and easy to arrange a bridging loan compared to other forms of finance. 

How Does A Bridging Loan Work For Business UK?

How Does A Bridging Loan Work For Business UK

If you want to take out a bridging loan, you need to use your valuable asset as security against the loan. Generally, this asset is land or property, but some businesses can also use other high-value assets as collateral.

 Bridging loan providers provide you with a loan according to the value of your asset or security. You can get an amount of a certain percentage of the value of your asset. It is known as Loan To Value or LTV. Most of the lenders offer a maximum of 75% LTV. 

Along with a valuable asset to use as security, you must have a viable exit strategy for quick loan approval. An exit strategy is a plan of how you will repay the loan amount. 

In return for the loan amount, the lender will charge an interest rate from the borrowers. This interest rate depends on the amount you borrow and the risk that lenders think they will have when offering a loan to you. Most often, the risk level is determined by your business’s credit score and current financial circumstances.

It is why start-up businesses with financial problems find it challenging to secure a loan, and they are also offered high interest rates

Typically, you have to repay the loan amount plus the interest at the end of loan terms. But some lenders also allow you to pay interest in monthly instalments if it is suitable for you.

What Are The Uses Of Business Bridging Loan?

You can use a business bridging loan for almost any legal purpose. But they are short term debts and are costly compared to traditional business loans; they are usually used for property purchases. You can also use it to overcome your current cash flow problems, such as paying daily wages, purchasing new stock, or paying tax bills. 

What Is The Cost Of A Business Bridging Loan?

The cost of bridge loan UKvaries from lender to lender. Moreover, it depends on a number of factors, such as the amount you are borrowing and the time after which you will repay the loan amount. However, the interest rate of bridging finance tends to be higher than other forms of finance. That is why borrowers consider it as a last resort. 

A typical bridging loan lender charges an interest rate from 0.5 to 1% per month. Other than interest rates, lenders charge different fees, including arrangement fees, valuation fees, and administration fees. All of these charges add up to the loan cost making bridging loans an expensive way of borrowing.

Therefore, before taking out a bridging loan, you must check for all the charges so that you can decide whether you can afford to take such a loan or not. 

What Are The Types of Business Bridging Loans?

Types of Business Bridging Loans

There are three main types of business bridging loans which are as follows:

Monthly

A monthly bridging loan is a simplest and cheapest option. However, it is not suitable for all businesses.

In this type of loan, you have to pay an interest rate on a monthly basis. At the end of the loan, you do not have a heavy pending payment.

But this type of loan may not suit businesses that have cash flow problems.

Retained

In a retained bridging finance structure, the bridging loan provider retained interest for the full length of the loan.

It means you have to pay the loan amount plus interest as a lump sum at the end of the loan term. When you take out a loan, the lender will calculate the amount you have to pay at the end.

It is an expensive way of borrowing, but many businesses find it suitable because no monthly payments disturb business cash flow.

Rolled Up

Rolled up bridging structure is similar to retained one, but in this loan type, the interest rate is added on a monthly basis.

It means that the interest rate can increase or decrease according to the current situation.

However, this type of business bridging loan is less expensive than retained interest loans.

What Can Be The Length Of Business Bridging Loan?

A bridging loan is a type of short term loan that can last from one month to three years. You can take out a loan for terms that suit you the most. However, most bridging loan lenders offer that last no longer than 18 months. This way, bridging loans are different from commercial mortgage loans that can last even for ten or more years. You must keep in mind that the longer-term you.

Pros And Cons Of Bridging Loans

Pros of Business Bridging Loan

The most significantadvantage of bridging loansis that they can be arranged much more quickly compared to conventional bank loans. Commercial bridging loans are still unregulated in the UK.

That is why lenders are more fragile in approving these loans. However, borrowers can get quick access to funds once the loan application is approved. Moreover, you can use any type of property as a security against the loan. 

Bridging loans are also more flexible than other business finance options because you control repayment methods.

The eligibility criteria of bridging loans are also flexible, and lenders are mainly not concerned with the credit score. You can secure a loan easily if you have a property to use as collateral and a viable exit strategy. 

Cons of Business Bridging Loan

Along with benefits, bridging loans have some disadvantages, such as being more expensive than long-term finances.

In addition, as they are unregulated, there are sometimes many hidden charges that increase the cost of borrowing.

What Type Of Lenders Do You Need For A Business Bridging Loan?

All the bridging loan providers do not offer commercial or business bridging loans. To get a business loan, you need a pacific type of lender. These lenders provide unregulated bridging loans. Regulated bridging loans are used for residential purposes.

Unregulated loans offer extra flexibility that business owners need. There are a number of bridging loan providers present in the UK offering business bridging loans. It is better to shop around and make price comparisons so that you can select a provider following best lending practices and offer competitive interest rates.

How To Apply For A Business Bridging Loan?

You can take a bridging loan for business either through a direct lender or through a broker. Whether you find a lender yourself or use a broker, there are several stages of the application process:

  • Initial Application
  • Property Valuation
  • Credit Check
  • Agreeing Terms
  • Release Of Funds

1. Initial Application

You have to fill an application form and provide information about how much you want to borrow and for how long. After assessing your application, your lender will provide you with an agreement in principle that describes how much you can borrow and what interest rate you have to pay.

2. Property Valuation

Most bridging loan lenders have valuation teams who visit your property for valuation before offering any loan terms and amounts.

3. Credit Check

Every individual possesses a credit score based on credit history. Lenders also conduct a soft credit check of the borrowers. Individuals with bad credit scores can also get a bridging loan, but it can affect the interest rate.

4. Agreeing Terms

Once you provide all information and your lender carries out all necessary checks, they will offer formal loan terms.

5. Release Of Funds

Once your loan application is approved, the lender and borrower’s terms are agreed upon, and funds are transferred to your bank account within a short time.

It can take from a few hours to weeks to complete the process from initial loan application to release of funds to the borrower.

What Can You Use As Security Against Business Bridging Loan?

Most individuals or business owners use land or property as a security against bridging loans. But it does not mean that if you do not own a property, you are not able to take out a business bridging loan. You can use high-value equipment, the value of unpaid invoices and even equity in your business as collateral.

However, bear in mind that the amount you can borrow is dependent on the value of the asset you are using as security. If you want to take out huge amounts, you must use expensive items as security.

How Can You Get Best Rates On Business Bridge Loan?

Cost Of A Business Bridging Loan

Bridging loan lenders have their own criteria to assess loan applications. However, they tend to offer the best rates for borrowers with the following:

  • A Good Security
  • Viable Exit Strategy
  • Good Credit Score
  • Experience In property

1. A Good Security

Typically bridging loans are secured against the property you own or one that you are purchasing. The more sellable and high value the property, the more likely the lender accepts your application and offers the best rates. In addition, your lender will look at factors like location and type of property.

2. Viable Exit Strategy

Your bridging loan application can be approved or rejected, depending on the strength of the exit strategy. The more likely you are to repay the loan amount, the more the lender is willing to offer the best rates. The lender will assess whether you are capable of achieving your plans or not.

3. Good Credit Score

Most bridging loan lenders are not concerned with the credit score of the borrowers. It can only be an issue if they are putting exit strategy at risk. However, if you have a good credit score, you can get more competitive rates. It is because your lender considers you as a low-risk borrower.

4. Experience In Property

Although having experience in commercial property is not a necessary thing to get a business bridging loan. Experience always works as a bonus to get more favourable rates. However, first-time investors can also get the best bridging loan rates if they have a strong exit strategy.

What Can Be The Alternatives Of Business Bridging Loan?

Although business bridging loans offer several advantages to the borrowers, it doesn’t need to suit the needs of all businesses. Before making a decision, you should explore all the available options. There are a number of options, and you can choose one that suits your needs. For example, if you have a property to use as security, you can go for a commercial mortgage with low-interest rates compared to bridging loans.

Other short term borrowing options include development financing and invoice financing. Moreover, you can ask your bank if it can arrange a short term business loan for you.

How To Find Business Bridging Loan With Shortterm?

In the shortterm, we have an experienced and highly qualified team of financial experts who can help you find the right product for your business. We understand that time is the most important thing for business owners. However, you may not have time to research or shop around to find the best bridging loan to fulfil your financial needs.

That is where we can help you through our comparison service. You need to provide us with some necessary information, and we will provide you with a quick comparison of leading business bridging loan providers. This way, you can choose the best lender that meets your business and budget requirements without wasting time and energy.