Understanding bridging finance

Bridging finance, as its name suggests, is a form of financing which, as its name suggests, is intended to “bridge the gap” between you needing funds and funds becoming available.  Here are some of the ways it can be used and how it compares to alternatives.

Buying a property

This is probably the best-known use of bridging finance, certainly in the consumer market.  If you buy a new home before you sell your old one, you typically need to carry two mortgages and a bridging loan may be what you need to make that possible.  You then pay it off when you sell your old home.

In the business world, bridging loans may be a useful way to buy a property outright.  There are basically two ways this could work.  One way is that you take advantage of the speed with which bridging loans can be arranged to snap up a property at a good price and then pay it back once you have a proper commercial mortgage confirmed.  If you’re going down this route then, obviously, you need to be really confident that you can get a commercial mortgage (or other funds).

The other option is that property is your business and that you are looking to buy a property, renovate it and sell it on.  In this case, bridging loans might simply be a faster and easier option than commercial mortgages, or mortgages of any description, especially if you are buying a property which needs substantial work done to make it habitable/usable.

Improving a property

Similar comments apply here.  Sometimes you can buy property at an exceptionally low price, because the building needs so much work done to it.  In fact, in some cases, the only practical option is to knock down the building and start again.  It can be very difficult to get traditional financing for these situations, hence the attraction of bridging loans.

Paying unexpected bills

This is where life can get more interesting.  Bridging loans can certainly be a useful way of paying unexpected bills, but they should not be used as a way to compensate for a lack of appropriate budgeting. 

In addition to setting aside money for predictable expenses such as regular bills, you should also be setting aside money to cover replacing essential equipment when it comes to the end of its lifecycle and/or renewing service contracts/licenses when they expire.  What’s more, if something or someone is essential to your business, then you should think seriously about putting robust insurance cover in place for it/them and setting aside funds to cover any excess.

If you do all of this, then you can substantially reduce the likelihood that you will find your company finances being thrown into disarray by unexpected bills.  At the same time, life does happen and so it can be very reassuring to know that bridging finance is there for you if you need it.

Dealing with cash-flow issues

Similar comments apply here.  Bridging loans can be a handy way of dealing with occasional cash-flow issues but they should not be used to compensate for a failure to address standard business issues such as proper budgeting, sensible price-setting, robust invoice-management and effective credit control.  If you find yourself continually dealing with cash-flow issues then you should probably take it as a sign that you should review the way you’re running your business.

On the other hand, even if you are applying top-class management skills, life does happen and so does business which means that there’s always the possibility that you might find yourself having to deal with a cash-flow issue which was genuinely unavoidable.  If that’s the case, then bridging finance could be very helpful to you.

If you’d like to know more about bridging finance, please get in touch with us.