How do bridging loans work?
A business bridging loan works in the same way by providing quick finance while waiting for other conditions to be met. In effect, a bridge loan is a short-term loan with a term of two weeks to one year that’s used until larger or longer-term financing can be arranged. The fact that there is more risk involved with a bridge loan makes it more expensive.
Let’s look at a few examples of how bridging finance can help in various business situations.
Property development
A property developer has the opportunity to purchase a commercial property with the plan to renovate the building and convert it to residential warehouse lofts. While waiting for project approval from the local council, the developer takes out bridging finance to purchase the property. Once the development has been approved, the developer can get a lower interest loan from a bank or other lender. Bridging finance was beneficial in this case because it made it possible to purchase the property quickly. The challenge with bridge loans is that you need an exit strategy. In this case, it was to get another loan after the development had been approved.
Financial emergencies
This is a common reason for getting bridge loans. One example is when partners decide to leave a business. For example, a family business could be running smoothly when one of the family members decides they want to leave the business. Let’s say one of two sisters who own the business wants to leave and take her share of the equity built in the business. The sister who decides to stay could use a bridging loan to pay the other sister out with the goal of getting another form of long-term finance (which takes longer to get) to pay out the business bridge loan.
Another family example is divorce and separation. When a husband and wife own and run a business together and the marriage is no longer working, one partner is likely to want to continue in the business while the other wants to leave and get a payout for their share. This could also be a requirement of divorce proceedings where certain deadlines must be met. Again, a bridge loan could be the answer by providing short-term business finance while long-term finance is organised by the partner who wants to keep the business. The long-term finance will be used to pay out the short-term, high-interest bridging finance.
In a third example, a company might have the misfortune of having its funds embezzled by a dishonest partner or employee. In this case, it might have to sell real assets it owns (such as real estate) to cover daily expenses. After the property is sold, the bridge loan is paid out.
An alternative to bridge finance
Although traditional bridging finance for residential real estate is offered by banks, business bridging finance is usually handled by specialist lenders. One alternative form of finance that can be used to meet short-term needs is online unsecured business loans. In recent years, small businesses have been turning to online unsecured lenders for fast, short-term finance solutions.
Moula, for example, uses leading-edge technology to safely and securely analyse the finances of potential borrowers online. In addition, there’s a short application that can be completed online within 10 minutes. Based on this information, a loan approval decision can be made within 24 hours. Once approved, the funds are immediately transferred into the borrower’s account.
Like bridging finance, the interest rate for online unsecured loans is higher than traditional business loans. Unlike bridging finance, these loans are not secured, so no property is needed as security.
Learn more about unsecured business loans from Moula and get the basics of small business loans.
Also, check out our business loan calculator to get an estimate of principal and interest repayments.
