What is a business bridging loan?

It isn’t uncommon for businesses of any size to require financial support at some point in their business journey.

Additional, short-term financing could help keep a business afloat or allow it to reach its full potential.

Several financing options are available to UK businesses, all of which could support business growth.

However, all methods may not be suitable depending on your circumstances.

It’s a good idea to always seek independent financial advice when looking to obtain financial support but, depending on your business. circumstances, it could be worth considering a bridging loan for more short-term financial support.

Read our guide on business loans.

What is a bridging loan for business?

A type of commercial loan, business bridging loans are a short-term financial solution for businesses of all sizes. They are also known as “commercial bridging loans.”

They are typically used by businesses in need of short-term funding.

As the name suggests, bridging loans can help “bridge” a gap in a business’ finances rather than be a permanent financial solution, such as the gap between a payment being due and another source of funding available to make that payment.

Bridging loans were initially marketed towards homeowners who wanted to buy a new house before the existing sale was completed.

Banks and building societies offered them, although fewer offer the service today due to the higher risks involved with bridging loans.

Over time, business bridging loans have become an option for businesses needing quick access to capital.

Read our guide to understand all working capital finance options available.

The uses of business bridging loans

A business bridging loan can be used for different types of financing needs.

However, because of the short-term loan period and higher rates of interest associated with them compared to other forms of business finance, they may be more commonly used for major business purchases such as property or specialised equipment.

There are several other uses for a bridging loan, including:

• covering the cost of a large amount of stock
• paying for office space renovations
• putting down a deposit on a property
• funding a business acquisition or merger
• providing working capital during a transitional period.

How do business bridging loans work?

A bridging loan usually requires the borrower (your business) to use assets as collateral against the loan.

This is to cover the lender should your business be unable to pay back the loan and interest, ensuring the lender does not lose their money.

The lender will then provide a certain percentage of the security value – this is known as the LTV or loan-to-value ratio.

The lender will also most likely charge interest based on the borrowed amount and the perceived risk (typically calculated based on your business’ credit score.)

The amount a business can borrow for a bridging loan varies depending on the lender, but the minimum is typically £10,000.

Some lenders may not have a limit on how much can be borrowed.

Bridging loans come in two options – open and closed.

Open business bridging loans have no set a date for payment, although loans are generally expected to be paid within a year.

Closed business bridging loans have a fixed payment date.

Your business will pay the total bridging loan amount plus any interest at the end of the loan period, although some loan providers may take monthly interest-only payments.

Read our guide on how to get business finance without a proven track record.

The benefits of a bridging loan

Flexibility

Specialist lenders can be more accommodating than high street lenders, potentially making securing a business bridging loan easier.

This is because they are more likely to consider individual cases, trading circumstances, and be more flexible in adjusting loan criteria.

Faster pace

As a business is more likely to secure a business bridging loan through a specialist lender, it may be possible to secure financing faster.

This could also be the case compared to other traditional forms of business financing.

No early repayment fees

Due to their flexibility, business bridging loans typically do not have early repayment fees.

However, it is worth checking with the loan provider if this is true for your business bridging loan.

Do business bridging loans have drawbacks?

Higher interest rates and fees

Business bridging loans are considered higher risk than other traditional forms of business finance so they may be packaged with higher interest rates.

Additional fees can include broker, lender, legal, and administration fees.

Read our seven business tips for dealing with high inflation.

A clear exit strategy is necessary

As they are not a long-term financial solution, your business may need a plan for further financing for when your business bridging loan period ends.

Risk of default

Because of the short repayment period and high-interest rates and fees associated with business bridging loans, businesses can be at risk of default if they cannot pay the entire borrowed amount and any interest.

Should this occur, businesses risk losing assets put up as collateral.

Alternatives to bridging loans for businesses

Business loans

Business loans can be obtained through high-street banks and independent lenders.

The money must be used for business purposes, such as starting a business or funding a business expansion.

Lines of credit

Business lines of credit are flexible loans that allow businesses to access a pot of money either as a lump sum or in instalments until the total amount is gone.

Like a business bridging loan, they may require the borrower to use assets as collateral.

Equity crowdfunding

Equity crowdfunding is a short-term method that collects small investments from lots of small investors and rolls them up into a larger consolidated loan that can be used to finance a project or business.

This is commonly done online and through crowdfunding platforms like Indiegogo or Kickstarter.

Invoice financing

Another form of short-term borrowing, invoice financing, is a way for a business to maintain cash flow while waiting for invoices to be paid.

A third party (typically a bank) will buy up a business’ unpaid invoices so the business can access a chunk of the cash they are owed sooner.

Explore other finance options with our guide to working capital finance.